It’s time to check in with Chris Mayer, Co-Founder and Portfolio Manager at Woodlock House Family Capital, and the author of 100 Baggers: Stocks That Return 100-to-1 and How to Find Them.
Long-time subscribers of Uncommon Sense Investor will remember we interviewed Chris a couple of years ago about his investment philosophy. See that interview below.
Chris writes regular blogs and his latest one features his answers to the many questions questions he receives about his approach to investing.
His style is different from many fund managers in that he owns a concentrated portfolio of 10-12 names with the intention of holding them for the very long term, as in decades in some cases.
The goal is to find 100 bagger stocks.
Here, we feature a few excerpts from Chris’s blog in which he answers questions about:
- portfolio construction,
- reasons for selling or not selling a stock,
- the stocks he would own if he could only have three,
- and the most important trait an investor can possess.
Chris is well-traveled and well-read with deep insights into successful investing.
by Chris Mayer
Let me preface my answers by saying: These are just my views and I offer them humbly. There are many ways to climb the mountain. Other people may find success with different strategies and ideas.
With that, let’s get started…
Can you please explain your thought process behind your portfolio construction strategy?
Where I am now: I like 10-12 businesses. I don’t push anything past a 10% weight. But if the stock appreciates beyond that, I let it run.
The reason I don’t “overweight” a single name to 20% (or something like that) is because in my experience I never get that right.
Invariably what I overweight underperforms and what I make a 3% position doubles.
So after seeing that happen again and again over the years, I decided to even out position-sizing a bit more – at least to start. It’s worked better for me.
Otherwise, I try to be aware of certain exposures: industry, geography and currency. I don’t mind significant concentration if the idea (or ideas) are strong enough.
For example I don’t mind having 25-30% of the portfolio in vertical market software (VMS) (i.e., Constellation, Topicus and Lumine) or Swedish serial acquirers. But maybe not 50%.
Meaning, I wouldn’t actively put that much capital toward one exposure, but over time the portfolio could get there via appreciation if a certain set of ideas outperforms a lot. That would be a good problem to have.
I guess the point I want to make is I’m not managing to any pre-arranged pie chart, where so much is in X, so much in Y and so on.
I don’t bother with the traditional categories people use (like market caps, value/growth, etc.)
How do you know when you’re wrong?
I got a lot of questions basically asking this (when to sell, etc.). I think selling is the hardest thing to do well in investing. And I don’t know that I have anything particularly fresh or new to say about it.
One thing I’ll say is it helps to write your thesis down. Clearly articulate why you own a certain stock. Use bullet points if that helps. Don’t have too many. Maybe just three-to-five key points that are essential.
You don’t want to get lost in details that don’t matter much. And you want to give your businesses some room to disappoint you now and again.
Owning a business for a long time means you’re going to own it during a stretch when it isn’t at its best.
But if the long-term thesis is still intact, you’re probably better off holding on. When the reason you own something is no longer valid, it’s probably time to move on.
Writing it down gives you a way to help keep yourself honest.
Selling is hard. Embrace a strategy that has you do less of it! I’m only half-kidding.
For a great piece on “the art of (not) selling,” I can’t recommend this enough by Chris Cerrone at Akre [Click here].
Another way to think about it is to invert the question. Reasons not to sell? Thomas Phelps in 100-to-1 in the Stock Market offered the following.
My stock is “too high.”
I need the realized capital gain to offset realized capital losses for tax purposes.
My stock is not moving. Others are.
I cannot or will not put up more money to meet my margin call.
Taxes will be higher next year.
Number 4 is kinda funny. Kids, don’t use margin!
If you were to be even more concentrated and own only 3/4 of the stocks from your portfolio – which stocks would you own?
1. Constellation Software (TSX:CSU)
2. Copart (NASDAQ:CPRT)
3. Teqnion AB (SEK:TEQ)
Am I close?
Ha! That’s not a bad trio, actually. That is a resilient bunch. I included this question because it reminded me of the converse: if you had to sell one stock in your portfolio, which would it be? I think about this.
Just in case something new comes up that is super compelling, at least I’ve given some careful thought about what to swap out.
In your experience, what is the most important trait an investor should develop for long-term success?
Patience. The ability to sit on a great business for two decades is a superpower worth cultivating. It’s how 100-baggers are born.