What’s the Book About?

100 baggers refers to stocks that could grow in value to $100 over time for each $1 invested. The book discusses the characteristics of such stocks and as well as the investment approach that one should adopt in order to achieve such results from their stock portfolio. 


Who Should Read? 

100 Baggers is most suitable if you wish to: 

  • Invest in the U.S. stock market. 
  • Compound wealth via Growth Investing over the long-term. 


The Formula: 

From this book, I learnt that there are two main factors that need to happen for a stock to become a “100-bagger”. They are: 

  • Growth in earnings. 
  • Growth in P/E Ratio. 


Let’s say we have A Inc. 

In Year 1, A Inc earns $100 million or $1.00 in earnings per share (EPS) based on 100 million shares. Its stock price is $15 a share. Thus, its P/E Ratio is 15. And so for this case, we bought shares of A Inc at $15 a share.


Then, A Inc expands its businesses and such results in its continuous increase in  earnings. After holding onto A Inc for 20 years, it earns $5 billion in Year 20, 50x the earnings in Year 1. Meanwhile in this 20-year period, the demand for A Inc’s shares grew. Thus, its P/E Ratio now is 30. Therefore, its stock price is $1,500. 


Thus, the shares of A Inc bought in Year 1 had appreciated 100x in 20 years. The appreciation is contributed by 50x in earnings growth and 2x in P/E Ratio. 


Focus on Earnings Growth

To achieve such feats, investors should focus on “earnings growth” of the stocks over the long-term. In “100-Baggers”, Christopher Mayer (author) has discussed several characteristics that are shared by stocks that could generate continuous growth in earnings for years and decades in the future. They include: 


1. Operated by Owners

There are two types of CEOs. First, it is one whose main income lies in his salary and bonuses. Second, it is one who owns 30% shareholdings of the company. In this case, the latter CEO has more motivation to expand the company and grow its earnings because a big portion of his wealth is tied up to the business, which is good because his interest is more aligned with investors of the company. 


2. Moats

This refers to a company’s ability to maintain leadership in the marketplace and thus, commanding better margins than its competitors. Typically, moats can be: 

  • Brands
  • Patents or ownership of other intellectual properties. 
  • Stickiness of customers to certain products / services. 
  • Lowest cost provider. 
  • Huge networks / economies of scale. 
  • Any competitive edge that is hard to be replicated. 


3. Stock buybacks

In the U.S., stock buybacks are becoming more popular as a means to reward or incentivise shareholders. Let me illustrate the effect of stock buybacks with the example above. Supposedly, A Inc practices stock buybacks consistently and the number of shares had reduced from 100 million to 50 million. We could see the stock could be a 200-bagger assuming that its earnings & P/E Ratio remains the same.


4. Leverage 

Christopher Mayer uses Berkshire Hathaway Inc as his case study, where Buffett uses insurance floats as leverages to build his billion-dollar stock portfolio. Over here, I won’t go through this as I wrote an article to explain this in detail. 

Link: 
Insurance Float – an OPM of the Rich to Build Mammoth Investment Portfolios


But, What About the Great Depression? 

Many are concerned as to what the markets, central banks, governments might and might not do in the future as they believe “these forces” could impact their stock performances. Sure, while that might be true in the short-term, but, if our investment horizon is for 10, 20 or 30 years, such forces are irrelevant as we are compounding wealth by focusing on stocks that consistently grow earnings. It is about building a “coffee-can portfolio” and just simply let time do its “magic”. 

In essence, there is no need to trade or speculate the markets. 


Conclusion: 

I discovered that the big money in stock investing is not in the “buying or selling of stocks” but in the “waiting”. It’s about time in the market than market timing in the stock market. As investors, the focus is on the business, not stock price. If investors heed this, I believe investors would propel themselves one-step closer towards financial abundance. 

Link: 
100 Baggers: Stocks that Return 100-to-1 and How to Find Them


Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 500+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com. Co-Founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

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