This conversation is part of our “Wisdom in Books” series and podcast.
We had the pleasure of chatting with Christopher Mayer, portfolio manager at Woodlock House Family Capital.
Chris discussed his book, 100 Baggers: Stocks that Return 100-to-1 and How to Find Them, with Alex Gilchrist of MOI Global.
The following transcript has been edited for space and clarity. (MOI Global members, access all features, including ways to follow up with Chris.)
Alex Gilchrist: What led you to write this book — how did it come about?
Chris Mayer: It started with Chuck Akre, a very well-known investor with a great track record. In 2011, he delivered a speech called “An Investor’s Odyssey.” In this speech, he went through his approach and mentioned a book by Thomas Phelps called 100 to 1 in the Stock Market as being a big influence on him.
I love reading investment books. At that point, I thought I had read every investment book there was, but I had never heard of this one, so I got a copy of it. It came out in 1972. Phelps had a varied career in finance, doing a number of different things. This book studied all the stocks that had gone up at least 100 times. I think his study starts in 1932 and runs to the end of the book.
He’s a great writer, very quotable, with a folksy manner. That book was super interesting, so I started to quote from it. I would tell people about it, and this went on for a little while. Finally, someone suggested to me, “Why don’t you update it?” A little light bulb went on. I said, “Wow! That’s a great idea. I should do that.” That’s how it came about. I went ahead and got research on stocks that have gone up at least 100 to 1 from 1962. That was as far back as I could get data at the time – from 1962 to about 2014. The book was published in 2015, but the data ends in 2014. That’s how I started the process of updating Phelps’ insights.
Alex: You’ve met up with the Oracle of Middleburg since then. How did that mark your conversion to this approach?
Chris: It was a slow process. I first reached out to Chuck to interview him for the book. I went out to Middleburg and met with him. He was very generous with this time. Ever since then, I have stayed in touch with him. I would see him at least once a year, for example, in Omaha at the Berkshire meeting.
I started to study his approach more and how he sits on these high-quality businesses he owns – like Visa, MasterCard, Constellation Software, Roper Industries, and a bunch of others. He has a great track record and a great nose for finding these things. Akre himself has had 200 baggers to his credit – one in Berkshire and one in American Tower, which are these otherwise big holdings he’s held forever.
I remember talking to him about this on several occasions. Over time, I started to see more of the wisdom in his approach. I would be in and out of different names, or my portfolio might turn entirely over five or six years, and he’d be sitting there with mostly the same names. I started to move more towards that style. Now, I would say I’m 100% in it, but it has taken a while to get there.
Alex: What have been some of the upsides and perhaps some of the downsides of this conversion?
Chris: The upside is easy. There’s a number of them. One, I would say you have less work to do in terms of finding new names. With the old approach, valuation was first for me. It was the thing I always focused on. If valuation is the number one part of your thesis, when the valuation closes, you have to find something else. There’s not necessarily any other reason for you to hang on. There’s more natural turnover in a portfolio that’s valuation-focused.
With this style, you allow stocks to run. Even when they become overvalued, you sit on them – as long as the growth, returns on capital, and so forth are still there. There’s a lot less turnover. It makes for a less frenetic existence. It’s more of a peaceful, calm portfolio. I like that aspect of it. Obviously, it’s much more tax-efficient because there’s lower turnover inherently. That’s not to say you couldn’t run a value-based portfolio with low turnover, but it’s easier and more inherent in this style. You learn more about businesses because you own them for a lot longer. Those are some of the upsides.
The downsides are hard to point at. It’s maybe more psychological because you pass on a lot of ideas and then some of them work out very well. Sometimes, you find something you know is really cheap and undervalued, but maybe the business isn’t all that good. It’s not something you would hold on to for a decade. You’ve got to let those go. That may be the downside – that it does requires a little more discipline to stay and have that quality bar and not go under it, no matter how tempting certain setups might be.
Alex: A lot of the time you must end up reading quite deeply different ideas and then not pursuing.
Chris: Yes, that’s one of the tougher things. There’s a lot of reading and a lot of passing on ideas.
Alex: Do you feel like, “I’ve put so much work into this now that I want to invest just because of the work I’ve done”?
Chris: Yes, I have that feeling – all the time. It happens a lot, but I think back to the exemplar of how Chuck Akre runs his portfolio, the way Phelps talks about it in his book, and even the research I’ve done in my book. It’s better to go ahead and ride those horses you’ve selected – assuming you’ve done a good job assessing the business – than constantly trying to catch the next opportunity.
Alex: What is the math of a 100 bagger? What are the tell-tale mathematics that lead to one?
Chris: That’s an interesting question because when I started doing the study, I thought it would be much more of a statistical-driven thing where I would show the correlation between two variables – these are the correlations here, so these are the things you want to look for. I learned very quickly it wasn’t going to work because the diversity of businesses that have returned 100 to 1 is absolutely amazing. It’s everything.
That’s another thing that came out of the book. There’s no industry concentration. There are tech companies, but there are railroads, banks, and chemical companies. They are from all over. There are a lot of different paths up the mountain, but when you get down to the basic essential ingredients, I think number one is you have to have a lot of growth. The companies that return more than 100 to 1 have grown by leaps and bounds, and they have eventually earned very high returns on their capital. Third, they have the ability to reinvest.
There are always exceptions, but in the main, most of those ideas were able to do this. Some exceptions might be companies that were so outstanding in their capital allocation that they gobbled up their own shares at a great clip or at just the right time. Their underlying business maybe wasn’t so great, but they were still able to get there.
In general, that’s the formula. You want high returns on capital, a lot of growth, and the ability to reinvest. Those are the three essentials. What follows off that is that you must have a very strong competitive position because once you find these three things, you have to apply them year after year after year. It’s a long haul. To get a 20-year run of earning high returns on capital implies you have a robust moat. A lot of the companies had good management teams. Like I say in the book, there’s Charles Schwab, and then there’s Josh Schwab – the man. There’s Walmart, and there’s a name – everybody knows Sam Walton. If I say McDonald’s, you think Ray Kroc. If I say Apple, you think Steve Jobs. There was often an entrepreneur who drove it. That would be another thing you could look for.
Alex: In terms of looking at growth, can it be hard to visualize in the sense that companies might have lumpy growth, so you wouldn’t think of it averaging out over a long period of time?
Chris: Yes, those make it tough. Sometimes, they’re lumpy; sometimes, they’re just completely unpredictable.
I like to use the example of Apple because it created markets no one would have guessed or foreseen. Who could have predicted it would create the iPhone? In the early days of Amazon, when it was a bookseller, who could have imagined AWS? You can’t.
There’s some luck involved, and that’s one of the points I make in the book, too. When I talk about the 10 different things you want to look for, I have to admit that one of the elements of 100 baggers is luck. It’s easier when you can find a company that’s more consistent compounding and you can see it has big markets, but every once a while, you’ll get some lumpy compounders. You’ll get some that surprise you by coming with up new products and entering new markets.
Alex: That’s something I want to touch on with Apple. I think there was a similarity with Gillette, and not just that Warren Buffett invested in both. You mentioned Gillette went from having a PE ratio of 10X at some point to 30X.
Chris: Yes, Gillette. There are other examples like that. I remember the Pepsi example because these companies were initially domestic, then they would expand overseas. That’s another element that gets it. Gillette created different razor blades and what we now call the razor-razorblade model because it was so successful in making that transition. There are lots of ways for businesses to get there.
Alex: When one of these companies is trading at a relatively small multiple, it’s easy to think it’s not that certain. All these other things could happen. Nokia phones got disrupted. Something else could come along. With Gillette, it’s just another shaving thing. You have Wilkinson and all these other brands. There are always arguments of thinking and not wanting to recognize that moat.
Chris: That’s right. When you look at the 100 baggers, those are the ones we dream about – where you can pick out something trading at 10 times earnings and then it goes to 35, so you get that tailwind of not only growing but a huge uplift in valuation. However, many 100 baggers were expensive most of the time. You’re buying something that’s generally well-regarded and you’re paying up. We all have examples of businesses we love that always look expensive. That’s more typical.
I like this analysis. If I ever do a second edition, I think I would do this. I have seen money managers like Terry Smith and other people do this where they will say, “Look at L’Oreal. It’s compounded at this rate for the last decade, or 15 years, or 20 years.” They’ll go back and say, “What’s the maximum PE you could have paid and still gotten a 15% return?” or whatever the number is. It’s always surprising how much you could have paid and still come out ahead. The PEs are very high, which makes you think that somehow, in some way, the market consistently underestimates these high-growth compounders.
Alex: Over time, return on equity or return on invested capital – whichever is the best metric to assess the return on owner’s equity – trumps price to earning or trumps the pricing.
Chris: Over the long term, yes, it does. That’s one of the things, too. I’ve been talking to people about the book since it’s come out, and if I did another one, I would probably emphasize this point more – that it’s extremely important to have the “business-first, valuation-second” kind of idea.
It’s not that pricing doesn’t matter; it is still important, but you have a lot more leeway there than you think. It’s much more important to be right on the business than to be right about the valuation in this particular style of investing. That’s where Munger makes a point. I forget how he says it exactly, but in the long run, you earn the return of the business – even if you pay an okay-looking price, you’re going to get the return of the business in the long term. That’s the point he’s making, too.
Alex: There’s another one I saw through Chuck Akre about how you have a constant valuation model. If you assume you’re buying at an expensive PE but that PE stays the same over a long period, you’ll get in the price the full expansion in earnings.
Chris: That’s right. You will. Many times, what I like to do now is model in some decline in the multiple over time. Even then, the math will work in your favor if the returns on capital are high enough and the reinvestment opportunity is plentiful enough.
Alex: Could you tell us about the average time period for these companies? Was it just between 16 and 30 years – a median of 26?
Chris: Yes, that’s about right. They formed a little bell curve. In the middle, there was about 25 to 26 years, and then they fell off between 16 and 30. It was interesting how that happened.
Alex: Does such a long-time horizon exclude a lot of professional money managers?
Chris: It probably does. Few managers are in a position to make a bet that goes that long. The book is about 100 baggers. These are the top best-performing stocks. Even these had extended periods where they did nothing or went down. Berkshire Hathaway was the number one stock in the study, but it had one seven-year stretch where it went nowhere. How many professional managers are in a position or in a structure where they could hold on to a stock in size and have it go nowhere for seven years? Can you imagine the pressure?
Multiple drawdowns are part of the life of a 100 bagger as well. All these names have had gut-wrenching declines, even the ones that do it in a short amount of time, like Monster Beverage. It’s among those that I think did it in about a decade. It had drawdowns of 40% fairly regularly.
It’s not for everyone, that’s for sure, but this is where the individual investor may have a bit of an edge because you can take a position like that, forget about it, and let it roll. That said, if you have the right structure, it’s certainly worth it to carve out a piece of your portfolio and try to go after these long-term compounders. That’s all I’m interested in now, and I think it will work out.
Alex: Maybe if you’re investing in such high-quality companies, it makes you more discerning about everything else.
Chris: It definitely makes you more discerning. It makes it easy to say no. There are a lot of ideas I see and I can say no within seconds. I can say, “No, I’m not going to do that.” The investable universe is maybe a little more manageable. That might be a positive. You can go through ideas a lot more quickly.
Alex: Let’s go to Monster Beverage. I thought it was quite interesting because the company had a point where it experienced very strong top-line growth. As it gained more and more market share, that started to taper off, but it was still able to expand margins even after that.
Chris: Yes, Monster Beverage is an interesting case study for a couple of reasons. One is because it got there so quickly, but the other was because it was among the ones where it was there in the numbers. You could see it, and you had plenty of opportunities to buy it and still make 100 times your money.
As you mentioned, even when it grew to a fairly good size, the gross profit over a five-year span went from like 34% to 52%, and the ROE greatly improved. That’s why I like that case study. It’s over such a compressed time horizon. You’re not talking about holding something for 25 years, which will be extremely difficult for most people. This was just a decade, and you were up 100X. It’s a pretty remarkable story. There are several of them. It wasn’t like this was the only one.
