Subscribers who’ve been with us for a while will remember our interview with Chris Mayer, the author of 100-Baggers, and co-founder and Portfolio Manager of Woodlock House Family Capital.
One of his essential principles to finding stocks that can increase by 100 times over many years was to not start selling at the first sign of market trouble.
In his latest article, Mayer uses two examples – one historical and one current – to illustrate how focusing on certain fundamental financial principles will help investors hold fast with their stock positions in order to be richly rewarded long-term.
by Chris Mayer
I often get some questions along the lines of “do you have any ways to help investors hold on to their stocks longer?”
I’ll show you a practice I use, which may help you as well.
It comes right out of the 1972 classic 100 to 1 in the Stock Market by Thomas Phelps, which Chuck Akre recommended to me years ago and which inspired my own book 100 Baggers.
Here is what Phelps did in his book: He created a table with some basic financials of Pfizer (NYSE:PFE) over the previous 20 years, like so:
Very basic, simple stuff. And then he asks
“Would a businessman seeing only those figures have been jumping in and out of the stock?”
And he answers: “I doubt it.”
I agree. Just look at those financials.
That’s a healthy business.
And if you held on for the whole 20 years, you were up something like 25x, excluding dividends.
But how many people held on for that 25-bagger? Probably not many.
As Phelps writes, the industry won’t let you.
The industry conditions you to measure performance using quarterly or annual stock prices.
You almost never see anyone print the results of their portfolio by showing you anything like this table.
You don’t see anyone in their quarterly letter show you financial snapshots of the businesses in the portfolio, or track their progress for you like this.
No, you see them write about stock prices being up this or down that.
So people focus on stock prices.
If you look at stock prices, you get a different picture.
For Pfizer, there were the usual peaks and valleys plus a five-year stretch where Pfizer trailed the market.
And because so many people have been “sold on the nonsensical idea of measuring performance quarter by quarter – or even year by year – many would hit the ceiling if an investment advisor failed to get rid of a stock that acted badly for more than a year or two.”
And they would have missed a wonderful ride.
So, I use Phelps’s method with my own holdings. I go back only a decade usually.
And I have some different numbers I use, but I recommend keeping it simple.
Here is a table for one of my holdings, Copart (NASDAQ:CPRT).
For purposes of this blog post, I picked out just three basic financial figures: sales, earnings per share and return on equity:
Looking only at those figures, would you want to be trading in and out of this stock?
Looked at over a longer-time horizon like this, you see the business has actually gotten better with age.
The ROEs today are almost double what they were in the earlier years… with no net debt.The stock is up ~20x from 2002 to today – and today the stock is 30% off its November high. (I’ve used the drawdown to add to my position).
Of course, the ride to 20x was not as easy as the financials look.
There were sharp drawdowns and periods of lagging the market averages.
There were economic worries and bumbling central bankers and fiat currency and bad stuff happening during those 20 years, too.
But again, focusing on these results alone and thinking like a business owner, you wouldn’t sell Copart.
So my recommendation:
Make tables like this for all your stocks. Keep these tables nearby. Update them. They will help you get through periods like this.
These tables may also be revealing in another way; they may expose all the poor businesses you own.
“But each investor must judge for himself,” Phelps writes, “primarily because he knows himself better than anyone else does.”
There are many paths up the mountain.
If you want to enjoy those wonderful multi-baggers – if you want to have a shot at multiplying your money 100-fold – then accept the challenge Thomas Phelps lays down:
“The secret of success in your quest for 100-to-one stocks is to focus on earnings power rather than prices. Can you do it?”
If you don’t get a 100 bagger, so what?
The idea is to think big, to play for a big prize.
Great putters try to hole every putt even though they know they won’t make them all.
Investors need to think like great putters.
If you follow these ideas, you’ll be richly rewarded over time, even if you never get a 100-bagger.
And to state the obvious: Those who never try guarantee they will never succeed.