Justin’s note: Earlier this month, we shared an important essay from Bonner & Partners’ Chris Mayer on the two keys to building a portfolio of 100-baggers (stocks that return 100-to-1). Today, we turn to him for more on this idea.
Chris has spent years researching the best ways to find 100-baggers… It’s not easy, or everyone would do it. He says the most important step is to make sure you’re not making this crucial mistake…
By Chris Mayer, editor, Chris Mayer’s Focus
In January, Mark Mobius, age 81, retired from Franklin Templeton (he’s since unretired to start a new asset management firm). In an interview with Barron’s, he let slip an admission about a mistake he made—one that keeps many good investors from ever having a shot at a five-bagger, much less a 100-bagger…
Mobius was famous as an emerging markets manager at Franklin Templeton, where he had been since 1987. He’s also famous for his distinctive shaved head and white suits. He looks like actor Yul Brynner.
Mobius also kept up a virtually nonstop travel schedule. He was on the road at least 250 days a year—visiting rubber plantations in Thailand, oil wells in Nigeria, or mining camps in Peru. I used to read his blog. Though he never tipped his hand much, I enjoyed reading about his travels.
He’s racked up all kinds of awards, though it is not clear to me what his track record actually is. No matter… He survived the investment game for more than 30 years and has wisdom to share.
Which brings us back to the Barron’s interview. He opined about many things and delivered a good line about bitcoin: “Whenever people ask me about bitcoin, I say I don’t talk about religion in public.”
But here’s the key exchange I want to draw your attention to:
Barron’s: What is a mistake you made that others can learn from?
Mobius: I was too rigid at times. We would focus too much on metrics like price/earnings and price/book ratios, and didn’t pay enough attention to the total picture. We didn’t have the imagination of what could happen over five or 10 years…
In my study of 100-baggers, I found that most were not obviously cheap at the time they began their runs. Almost all of them required that their investors have a deep understanding of the business and a strong belief about their ability to grow. So armed, an investor could hold on through the rollercoaster rides that 100-baggers often give.
A truly great business that can grow many times its current size is not often available at a low price-to-earnings (P/E) ratio. If investing were as simple as buying stocks when they have low P/E ratios, then a lot more people would be rich.
But it is hard to get rich in such a rote way. And most people get stuck on one of their favorite metrics. I’ve done it. Almost everybody has.
Even the Best Investors Make This Mistake
François Rochon, who manages money at Giverny Capital, shared a classic example. At a Google Talk this past December, he reminisced about Starbucks:
I looked at it, I think the first time was in 1994. I thought that was a unique business… When I first tried Starbucks, I said, “Well, these people are on to something, and they’ll do well.” … Howard Schultz was a very ambitious and a very driven CEO. He was very confident that Starbucks could have thousands and thousands and thousands of coffee stands everywhere in U.S. and in the world. I thought it was indeed possible…
But he didn’t buy it. Why not?
The only thing that prevented me to invest 23 years ago was the P/E ratio of Starbucks. I remember it was trading at 40 times earnings. That was way too high for me… but the stock is probably 100-fold since then.
We have all had such experiences.
Another example makes a similar point. You know how Amazon has killed retailers of all kinds? From Sears to Barnes & Noble to Bed Bath & Beyond… all their stock prices have collapsed as Amazon took away sales and profits.
Yet, the shares of Best Buy, the electronics retailer, have outperformed Amazon shares since 2013. See the chart below…
I think you would’ve found few people willing to make the bet that Best Buy would stand a chance against Amazon’s onslaught.
Even the story of Amazon is a great dish of humble pie…
Back in 1998, I wouldn’t have touched it. The internet bubble was on and Amazon looked like a very expensive bookseller. After the tech bubble collapsed in 2000–2002, Amazon lost 90% of its value.
How many people, knowing this, would’ve bought Amazon in 1998?
And yet, Amazon has delivered a return of 32% annually since 1998. A $10,000 investment would be worth $2.7 million today—even with that 90% drop!
Prediction is hard. Cause and effect is not easy to pin down. There are so many tangles of connections…
The point here isn’t to ignore valuation. That would be foolish. The point is not to rely on any single metric—of any sort.
The point is to think more comprehensively about the business… and to be humble about what you know.
Editor, Chris Mayer’s Focus
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