100 Baggers by Chris Mayer
100 Baggers by Chris Mayer
I have completed the 100 baggers book by Chris Mayer. Personally, I am not too impressed by the insights provided by the book. The content seemed to be an amalgamation of the thoughts and quotes / best practices of the more esteemed value investors, with little original insight. I personally like the philosophy of the book to prepare the investor towards longer term holdings instead of churning the portfolio unnecessarily, but there are salient points that I think are logical fallacies and very dangerous for the amateur investor, and hard to implement even for full time investors. Nonetheless, I have shortlisted a number of professional investors that is attempting to implement this approach and I may segregate a portion of my <Mental-writeoff> portfolio to these stock ideas.
Problems with the Hundred Bagger approach
1) Huge survivor-ship bias and <Qualitative Back Testing>
Due to the adaptive nature of the markets, I do not think that a common quality / factor that is present in past success cases, can be reliably extrapolated to future cases. Specifically, I question the fact that the author places tremendous weight on owner operator companies as a panacea for investment success, to the point that charlatans <Theranos and Nikola> began to use this antic to market their <Silly-con Valley Startups> . Although I like the skin in the game and shareholder-manager alignment, which will encourage managers to put in their best, I noted that the author cherry picks the successes and downplays the failures.
Among the owner-operator present day champions such as Berkshire Hathaway and Amazon, there are reverse hundred baggers like Enron, Theranos and Valeant. Specifically in Asian companies, an investor implementing a 10-stock Coffee can portfolio into owner operator companies such as HongKong Land <Jardine family, Potential Value trap>, Hyflux <Olivia Lum, Recently Bankrupt>, Creative Technology <Sim Wong Hoo>, Salim conglomerate <Notorious for mistreating shareholders like First REIT>, Silverlake Axis <Potential Value trap due to stagnant revenue growth>, Stamford Land <Huge share correction due to perceived minority shareholder mistreatment in favor of family control> will not have seen the 100 bagger results the author wax lyrical about, and probably kicked out of his own fund.
I also note the irony that Chris Mayer is unable to provide statistical evidence of the predictive power of his findings. He cannot confirm the results can be reliably reproduced when questioned directly. Personally, I am not against the tactic fund managers use to publish books to publicize themselves to attract AUM as I believe this process will attract investors that are aligned with the managers philosophy. But before taking their recommendations wholesale, I will apply a wind-age factor to the methods he is proclaiming.
Chris Mayer on 100-Baggers
In fact, some of the concentrated portfolio managers mentioned in the book has blown up by buying stocks like Valeant and has vanished to obscurity The other survivors like Sequoia and Bill Ackman managed to recover but it is an traumatic setback that impaired their investment records and AUM for years. Currently, I do not think I am as good as them and I find it difficult to implement it at face value, and will opt for a more diversified approach.
2) Great book on salesmanship and narratives which can be used to justify anything.
There is this quote that I particularly like.
The vision to see it. The courage to buy it. The patience to hold it.
The author downplays the fact that it is hard to predict something that haven't happened yet, and luck is a dominant factor even for growth companies in blue oceans. Jeff Bezos did not imagine the Alexa and Cloud computing when he setup his company. Mastercard certainly did not exhibit any evident factors isolated by the book. There is a possibility that Gamestop can be the next hundred bagger by his logic <Maybe it already is>.
This quote can be used as a rallying call by WSB <Retards> to buy any meme stocks like Gamestop or even Dogecoin.
3) Execution issue on coffee can Compounders
Books tend to be an intiator / leads generator for <Buy side funds> to bring in customers. Although I like the book and the way the fund manager shares their wisdom, I also did some parallel analysis and noted the
Small cap premium Vanished for the past 30 years <Aswoth Damodaran + AQR capital> . I do not like the idea of an investor having blind faith in narratives and rules of thumbs which can lead to permanent impairment of net worth. The professional investors whom claimed to be influenced by the book also had challenges in implementing the coffee can approach in the funds they are managing. There are other issues which can be summarized as the below impossible trinity.
1) Cheap and quality business by evident metrics.
=> Requiring a deep circle of competence than is not shared by the market, or an industry utterly despised by wall street
=> Motley Fool and Sequoia and other Private Equity funds compete for coverage for narrative stocks, making undervalued gems exceptional unlikely unless in a market correction. Moreover in the low interest environment, there is strong competition from Venture capitalists whom incubate and IPO Unicorns, which may have permanently impaired the small cap premium.
=> I am unable to scuttlebutt in depth in US / HK/CN market. SG listed Co has no obvious champions with unique business models and deep moats. I might be using other methods to try to locate them like spinoffs or special situations but I do not have a high conviction that I have better knowledge than analysts in their home markets.
2) Small Business which have strong moats.
=> It is only when they reach a certain size that is when moats are firm and entrenched <GoPro and Snapchat getting destroyed by copycats and Technological obselence>
=> For com-pounders to exist, they require strong returns to capital which are protected by the moat. This Chicken and egg problem is conveniently hand-waved away. Network effects, operational leverage economies of scale and scope only become strong when the company reached a break even size.
3) Companies are dynamic and businesses will always adapt and succeed
=>Owner Operator companies <Valeant and Enron> can fail due to fraud or execution failures.
=> Managers can be deceased or ousted <Apple>. The new managers may not be as friendly <Asia family owned companies, Hong Kong Land, Indonesian Salim family Conglomerates, India Tata family feuds> and value their family control and their empire over the rights of minority <Outsider> shareholders
=> A winning formula in the past could have huge concealed risks that are not apparent at the start. <Enron, Valeant>
=> Inability to expand abroad <Hyflux, Creative, HongKong Land, Singtel>
I may be too critical about the ideas of the book, but personally I think the main ideas of the book is sound and is a philosophy the long term growth investor should embrace. Execution of this <Coffee Can Compounder portfolio> is way harder than it appears to be. Nonetheless, I shall try to refine my checklist using the most robust ideas / business models covered in the book and add additional tools to my toolbox. In the meantime, I will strive to accumulate my warchest until interesting opportunities await!