100 Baggers

1. Hunt for companies with high growth potential and the ability to reinvest profits

"Over a period of years, our thinking has focused more and more on the issue of reinvestment as the single most critical ingredient in a successful investment idea, once you have already identified an outstanding business."

Reinvestment is key. The most crucial factor in finding 100-baggers is identifying companies that can consistently reinvest their profits at high rates of return. This compounding effect is what drives exponential growth over time. Look for businesses with:

• Large addressable markets
• Strong revenue and earnings growth
• High gross margins
• Ability to scale without significant capital expenditures

Growth and value creation. Seek out companies that not only grow in size but also create value for shareholders. This means focusing on per-share metrics like earnings per share and book value per share growth, rather than just overall company size.

2. Focus on businesses with sustainable competitive advantages (moats)

"A truly great business must have an enduring 'moat' that protects excellent returns on invested capital."

Identify durable moats. Look for companies with strong competitive advantages that allow them to maintain high profitability over long periods. Common types of moats include:

• Network effects
• Switching costs
• Brand power
• Cost advantages
• Intangible assets (patents, licenses)

Analyze competitive landscape. Assess the industry dynamics and the company's position within it. Look for signs that the moat is widening over time, rather than eroding due to competition or technological disruption.

3. Seek out owner-operators with significant skin in the game

"By virtue of the owner-operator's significant personal capital being at risk, he or she generally enjoys greater freedom of action and an enhanced ability to focus on building long-term business value."

Aligned incentives. Owner-operators with substantial ownership stakes tend to make decisions that benefit long-term shareholders, rather than focusing on short-term results or personal gain. Look for:

• Founders or long-tenured CEOs with large ownership stakes
• Track records of creating shareholder value
• Conservative accounting practices
• Thoughtful capital allocation decisions

Study management's actions. Pay attention to insider buying and selling, as well as how management communicates with shareholders through annual letters and conference calls.

4. Look for smaller companies with room to grow exponentially

"Start with acorns, wind up with oak trees. Start with oak trees, and you won't have quite the same dramatic growth."

Size matters. While not a hard rule, focusing on smaller companies (generally under $1 billion market cap) increases your odds of finding a 100-bagger. Smaller companies have:

• More room to grow within their addressable markets
• Greater potential for operational improvements and scaling
• Less analyst coverage, creating potential market inefficiencies

Don't limit yourself. Remember that even mid-sized companies can become 100-baggers if they have strong growth runways and excellent management. The key is finding businesses with long growth tailwinds ahead of them.

5. Be patient and hold stocks for the long term to benefit from compounding

"Be not tempted to shoot at anything small."

Long-term mindset. Achieving 100-bagger returns requires holding stocks for extended periods, often a decade or more. This allows the power of compounding to work its magic. Cultivate patience by:

• Focusing on business fundamentals rather than short-term price movements
• Avoiding the urge to trade frequently
• Mentally preparing for periods of underperformance or volatility

Coffee can portfolio. Consider adopting a "coffee can" approach, where you commit to holding your best ideas for a set period (e.g., 10 years) without selling, regardless of short-term performance or market conditions.

6. Concentrate your portfolio on your best ideas

"I can't be involved in 50 or 75 things. That's a Noah's Ark way of investing—you end up with a zoo that way. I like to put meaningful amounts of money in a few things."

Quality over quantity. Concentrate your portfolio on your highest-conviction ideas rather than diversifying excessively. This approach allows your winners to have a meaningful impact on overall returns. Consider:

• Limiting your portfolio to 10-20 stocks
• Allocating larger positions to your best ideas
• Continuously reassessing your holdings and replacing weaker ideas with stronger ones

Kelly criterion. Study the Kelly criterion for position sizing, which suggests betting more heavily on investments where you have a larger edge. While not applicable in its pure mathematical form to stock investing, the principle of concentrating on your best ideas is sound.

7. Pay attention to return on invested capital (ROIC) as a key metric

"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."

ROIC importance. Focus on companies that consistently generate high returns on invested capital, as this indicates a strong competitive position and efficient use of resources. Look for:

• ROIC consistently above the cost of capital
• Improving ROIC trends over time
• Management's focus on ROIC as a key performance metric

Reinvestment opportunities. High ROIC is especially powerful when combined with abundant reinvestment opportunities, allowing the company to compound value at high rates for extended periods.

8. Don't overpay, but be willing to pay fair prices for great businesses

"Good stocks are seldom without friends."

Valuation matters. While paying a low price is preferable, don't let valuation alone dictate your investment decisions. Great businesses often trade at premium valuations, but can still deliver exceptional returns over time. Consider:

• Focusing on long-term earnings power rather than short-term multiples
• Using discounted cash flow analysis to estimate intrinsic value
• Being willing to pay up for companies with strong competitive positions and growth runways

Balance growth and value. Seek out businesses that offer a combination of reasonable valuation and strong growth prospects, rather than solely focusing on deep value or high-flying growth stocks.

9. Ignore short-term market noise and focus on long-term business fundamentals

"Bear market smoke gets in one's eyes."

Tune out the noise. Avoid getting caught up in short-term market movements, economic forecasts, or attempts to time the market. Instead, focus on:

• Understanding the underlying business and its long-term prospects
• Monitoring key performance indicators specific to the company and industry
• Staying informed about competitive dynamics and industry trends

Prepare for volatility. Recognize that even the best-performing stocks will experience significant drawdowns along the way. Develop the mental fortitude to hold through these periods by focusing on the business rather than the stock price.

10. Learn from past 100-baggers across various industries and time periods

"There are only so many ways up the mountain, and we'll map out these paths in what follows."

Study history. Analyze past 100-baggers to identify common characteristics and patterns. This can help you recognize potential multi-baggers early in their growth trajectories. Key lessons include:

• 100-baggers come from various industries and time periods
• Many start as smaller, lesser-known companies
• Strong business models and management are crucial
• Patience and a long-term holding period are essential

Apply timeless principles. While specific companies and industries change over time, the fundamental principles of identifying and holding great businesses remain consistent. Focus on these enduring lessons rather than trying to replicate specific past successes.

Last updated: October 23, 2024