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April 29 - May 8, 2018
Phelps advises looking for new methods, new materials and new products—things that improve life, that solve problems and allow us to do things better, faster and cheaper.
Don’t sell just because the price moved up or down, or because you need to realize a capital gain to offset a loss. You should sell rarely, and only when it is clear you made an error.
The most powerful stock moves tended to be during extended periods of growing earnings accompanied by an expansion of the P/E ratio.
I call these two factors—growth in earnings and a higher multiple on those earnings—the “twin engines” of 100-baggers.
“Our analysis of the 100x stocks suggests that their essence lies in the alchemy of five elements forming the acronym SQGLP,” they wrote: S—Size is small. Q—Quality is high for both business and management. G—Growth in earnings is high. L—Longevity in both Q and G P—Price is favorable for good returns.
To make money in stocks you must have “the vision to see them, the courage to buy them and the patience to hold them.” According to Phelps, “patience is the rarest of the three.”
It takes vision and imagination and a forward-looking view into what a business can achieve and how big it can get. Investing is a reductionist art, and he who can boil things down to the essential wins.
As Darwin said, “It is not the strongest or the most intelligent who will survive but those who can best manage change.”
Jason is reluctant to buy a high-ROE company where the top line isn’t at least 10 percent. But when he finds a good one, he bets big.
“I said to people if you can’t pick winners, you should be in exchange-traded funds (ETFs). But if you can pick winners and you put only 1 percent in your best idea, that’s irrational.”
When do you sell, I asked? “If the ROE doesn’t fall below 20%, generally, I don’t sell,” Jason answered, “unless the valuation gets stupid.”
Capital allocation equals investment. And CEOs have five basic options, says Thorndike: invest in existing operations, acquire other businesses, pay dividends, pay down debt or buy back stock.
They also have three ways to raise money: issue stock, issue debt or tap the cash flow of the business.
When you find a company that drives its shares outstanding lower over time and seems to have a knack for buying at good prices, you should take a deeper look. You may have found a candidate for a 100-bagger.
In the overwhelming number of cases, a company needs to do something well for a very long time if it is to become a 100-bagger. Persistence is as essential to a 100-bagger as gin to a martini.
“It’s common sense to pay more for something that is more durable. From kitchen appliances to cars to houses, items that last longer are typically able to command higher prices. … The same concept applies in the stock market.”
Don’t chase returns! And don’t measure yourself against the S&P 500 or any other benchmark. Just focus on trying to buy right and hold on.
when we invest abroad we often trade risks we see for risks we can’t see or are not aware of. Be mindful of this.
The ideal business during an inflationary time is one that can (a) raise prices easily and (b) doesn’t require investment in a lot of assets.
Akre’s approach is simple and easy to understand. He calls it his three-legged stool. He looks for businesses that have historically compounded value per share at very high rates; highly skilled managers who have a history of treating shareholders as though they are partners; and businesses that can reinvest their free cash flow in a manner that continues to earn above-average returns.
you need a business with a high return on capital with the ability to reinvest and earn that high return on capital for years and years.
Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.
“Obviously,” Phelps concludes, “dividends are an expensive luxury for an investor seeking maximum growth. If you must have income, don’t expect your financial doctor to match the capital gains that might have been obtainable without dividends. When you buy a cow to milk, don’t plan to race her against your neighbor’s horse.”
No one creates a stock so you can make money. Every stock is available to you only because somebody wanted to sell it.
The story of Ronald Read shows you the power of simple investing concepts: keeping fees low, investing in quality companies, reinvesting dividends and—most importantly for our purposes—the power of just holding on.
If you are hunting for 100-baggers, you must learn to sit on your ass. Buy right and sit tight.
