The Epic Quest For Multi-Baggers

Compounding.  In a word, it’s the “secret sauce” that makes wonderful things like retirement possible.  If you want to have enough money to retire someday, you really WANT to compound your money.  And there’s no better investment to compound money than common stocks.

Sure, you could stash your savings in a bank account, but at today’s interest rates you won’t be compounding more than a few pennies per month.  You’ll actually lose money after accounting for inflation.

Bonds are only slightly better (and slightly more risky) than a savings account.  They’ll pay-out a couple percentage points per year (at best) and that’s still not a lot of compounding.

For most people, owning common stocks is your best bet for compounding money.  It’s the ability of common stocks to double, triple, and then keep doubling that makes stocks the go-to rocket fuel for your portfolio.

These stocks that multiply your original investment many times over are called “multi-baggers“.  Quite literally, a single investment in one multi-baggers can create a small fortune, and ensure a very comfortable retirement.

The Quest To Compound

With multi-baggers, it’s possible for a investor to multiply their original investment many times over.  Can you imagine multiplying your net worth by 10, 20, or even 100 times?  Stocks like this are the golden goose that every investor wants to find…

The trick is in finding them.  How do you actually find multi-baggers?

Well, it’s not easy!  Most investors will typically stumble onto one by chance, get a few doubles out of it, and then eventually sell (taking some very large gains).

Unfortunately, I want better than a “random chance” when hunting stocks to own for the long-term.  Wandering aimlessly through the desert is just NOT a good way to find water.

Thankfully, someone has done much of the necessary research for me — The topic of finding multi-bagger stocks is the subject of Chris Mayer’s recent book “100 Baggers: Stocks That Return 100-to-1 and How To Find Them“.

In his book, Mayer doesn’t attempt to create a formula, instead he builds something more akin to a “blueprint” for what multi-baggers look like.

Mayer did this by studying every 100-bagger from 1962 to 2014.  He found 365 stocks that met this criteria (listed in the book’s appendix), and provided several as case studies in his book.

I won’t recount every case study here (you’ll have to read the book for that), but I will highlight some of Mayer’s findings…

The 100-Bagger Criteria

In his book, Mayer highlights the following attributes that were common among 100-baggers:

1.  They started small.  It stands to reason that smaller stocks have the largest capacity to grow, and thus investors will have the best opportunities to capture multi-baggers by focusing on stocks with smaller starting market caps (usually less than a $1 billion market cap).  Many 100- baggers actually started out as microcaps (stocks with a market cap of less than $300 million) in the study.

Due to their small size, these are NOT stocks you will initially find in the S&P 500.

2. High quality businesses (and management).  Quality definitely matters when it comes to buying stocks, but this is by far the hardest attribute to judge.  Mayer offers a few hints in the book, like high levels of insider ownership, having a ‘moat’, and high returns on equity as good hints on how to judge a business’s quality.

I’d also like to add that consistency of earnings, reasonable debt levels and low dividend payout ratios are also exceedingly important for judging business quality.

3.  High sales growth rates.  Obviously faster growing stocks have a greater ability to compound earnings over time.  Stocks with slowly growing sales (<10% annually) will probably take too long to compound.  In his book, Mayer points out examples of stocks that maintained sales growth of 20% per year for many years.  This sales growth is key.  The ability to start small and grow into something BIG is exceedingly important if you want to realize a multi-bagger.

4.  They have a very long runway.  If you want to buy stocks that have a chance at serious compounding, having a long runway for growth (and a long life expectancy) is extremely important. It’s also very difficult to predict (IMHO).

For example:  If you were an early investor in Apple or Microsoft, would you have been able to predict the rise of the iPhone, the Xbox, or Cloud services?  Not a chance!  Those kinds of devices and technologies just didn’t exist back in the early days of computing when those stocks were tiny.

Stocks with fast growing sales might also turn out to be short-term fads that eventually crumble.  Judging the length of the runway is actually really hard when considering the long-time periods necessary to compound into multi-bagger status.

5.  Reasonable stock prices.  Last, but not least is price.  Yes, price is important too!  How much are you paying for all that growth?  It is possible to overpay for growth, paying extreme multiples (such as >50 times earnings) where the underlying business may never compound enough to justify a price that high!

Tech stocks in our current market are perfect examples of this.  It’s far better to pay a reasonable multiple (PE of <20) for stocks with good growth rates.

Patience Is Important Too

One of the more important lessons I’ve learned over the years is patience.  Patience is critical to earning outsized returns from multi-bagger stocks.  I can’t stress this point enough.  It can take a LONG time for stocks to double or triple, and even longer to reach 100-bagger status.

Mayer’s 100-bagger book offers the following chart that gives a good perspective on just how long this kind of incredible compounding takes:

Clearly it takes a loooong time to reach 100-bagger status… unless of course the stock compounds at extremely high rates of return.  (Which is quite rare indeed.)

Side Note: The only recent stock I can think of that reached 100-bagger status faster than 11 years is Tesla (which reached 100-bagger status in about 10 years).  Clearly Tesla was a rocket ship which captured the hearts and minds of the world’s investors.  Tesla’s stock price has outperformed the business underlying the stock, so it’s anyone’s guess if the business can compound enough to be worth the $734 billion valuation it has today.  If it doesn’t, the stock might crash some day.

Obviously most stocks won’t be returning 50% a year for 11 years straight.  Those kinds of returns are absolutely outstanding!  So how long does it usually take to reach 100-bagger status?

Mayer’s 100 Bagger study provides another chart covering how long it took for those 365 stocks to reach 100-baggers status:

The vast majority of stocks in the study (over half), took 16-30 years to reach 100-bagger status.  That’s a significant holding period, and far longer than the sub-1 year period that most investors hold stocks these days.

Clearly patience is a virtue when it comes to compounding money.

Does The Formula Actually Work?

In my investing experience, I’ve had the good fortune to purchase a few multi-bagger stocks of my own.  So, I thought it might be fun to see how closely my biggest winners fit to the 100-bagger “blueprint” as Mayer lays out in his book.

My portfolio is a mix of index funds and individual stocks, so I don’t have a ton of multi-baggers to look at, but here’s a few that I own/have owned:

At the time when I invested in these stocks, I had never heard of Chris Mayer or his 100-bagger study.  As you can see from the “# of Mayer Criteria” column, most of my multi-baggers didn’t really fit his ideal criteria at the time of purchase.

That said, I’ve still managed to earn some very decent multi-bagger returns.

Of my multi-baggers, FR, PTR, and MAA were the closest to Mayer’s 100-bagger criteria, but they were definitely NOT fast growers.  I simply purchased these stocks when they were extremely cheap.  I got lucky I guess.

In the case of MAA and FR, the performance of these two REITs is also deceptive due to the large dividends I’ve collected over the years.  Dividends have doubled at both REITs since I’ve held the shares.

What’s interesting to note is that all of these stocks pay dividends.  They don’t necessarily have big dividends, but I think it’s partly the dividends that kept me holding through thick and thin.

Like all stocks, my multi-baggers went through tough periods where the stock wasn’t rising.  I held-on (in-part) because of the dividends.  I wasn’t so worried about the stocks “going up” every year when I could collect dividends.  Thus, I was more patient with these stocks during down markets.

Notice that I still own most of these stocks.  Will they some day turn into 100 baggers?  Only time will tell, but most will probably need at least another decade before I can say if they’ll become 100-baggers.

Final Thoughts

While I enjoy studying a good stock picking strategy as much as the next investor, I’ve found that most stock picking strategies have problems.  These problems tend to make most stock picking strategies underperform in the real world.

In the case of the 100-Bagger strategy, survivor bias is a very real problem.  Clearly the study by Chris Mayer is only looking at the survivors (which he freely admits it in his book).  There could have been hundreds of companies with similar identified attributes that either  went out of business or otherwise failed (and thus never showed-up in his study).

Is the 100-bagger strategy simply looking at the attributes of random survivors over long periods of time?

It’s a very real possibility, and certainly a concern that investors should deeply consider.  Which begs the question — Can investors actually select and pick these mega multi-baggers?

It seems possible.  Mayer’s logic around compounding isn’t wrong, but it’s fraught with problems and potential missteps.

To summarize my thoughts on this strategy — “If it was easy, everyone would be doing it.”

Thanks for reading everyone!

[Image Credit: Flickr]