Nick’s Note: At the Daily, we consider Chris Mayer an “honorary PBRG analyst.” That’s because when it comes to finding stocks that can return 100-to-1, there are few who are better. (His book, 100 Baggers: Stocks That Return 100-to-1 and How to Find Them, is required reading around the office.)

Chris says that finding 100-baggers isn’t easy—otherwise, everybody would own them. But you can narrow your search if you focus on these two things…


By Chris Mayer, editor, Chris Mayer’s Focus

Beating the market over the long term is hard to do.

If you want to learn how it’s done, Berkshire Hathaway bears repeated study…

Berkshire was the top performer in 100 Baggers, my study of stocks that returned 100-to-1 from 1962 to 2015.

The stock had risen more than 18,000-fold, which means $10,000 planted there in 1965 turned into an absurdly high $180 million 50 years later, versus just $1.1 million in the S&P 500 over the same period.

Berkshire—and the other 100-baggers in the study—affirms that not only can you beat the market, but you can also leave it miles behind…

There are two important factors you need to consider if you want to achieve that kind of outperformance. I’ll go over them today.

No. 1: Don’t Own Too Many Stocks

First, you have to be concentrated. You have to focus on your best ideas. You can’t own a lot of stocks that just dilute your returns.

Warren Buffett, as is well known, did not hesitate to bet big. His largest position would frequently be one-third or more of his portfolio. Often, his portfolio would consist of no more than five positions.

There is, for example, the time he bought American Express in 1964 in the wake of the Salad Oil Scandal, when the stock was crushed. He made it 40% of his portfolio.

Charlie Munger, too, is famous for his views on concentration. He’s had the Munger family wealth in as few as three stocks:

My own inquiries on that subject were just to assume that I could find a few things, say three, each which had a substantial statistical expectancy of outperforming averages without creating catastrophe. If I could find three of those, what were the chances my pending record wouldn’t be pretty damn good…

How could one man know enough [to] own a flowing portfolio of 150 securities and always outperform the averages? That would be a considerable stump.

Concentrated Investing also includes profiles of investors who ran such concentrated portfolios. These include Buffett and Munger, along with lesser-knowns such as John Maynard Keynes, Lou Simpson, Claude Shannon, and more.

  • Lou Simpson ran Geico’s investment portfolio from 1979 to retirement in 2010. His record is extraordinary: 20% annually, compared to 13.5% for the market.

    Simpson’s focus increased over time. In 1982, he had 33 stocks in a $280 million portfolio. He kept cutting back the number of stocks he owned, even as the size of his portfolio grew. By 1995, his last year, he had just 10 stocks in a $1.1 billion portfolio.

  • Claude Shannon is another. He was a brilliant mathematician who made breakthroughs in a number of fields. He might also be the greatest investor you’ve never heard of. From the late 1950s to 1986, he earned 28% annually. That’s good enough to turn every $1,000 into $1.6 million.

The point is that many great investors focus on their best ideas. They don’t spread themselves thin. And there is also more formal research in the book that supports the idea that focus is a way to beat the market.

No. 2: Leave Your Stocks Alone

The second part of this is to hold on to your stocks. The power of compounding is amazing, but the key ingredient is time. Even small amounts pile up quickly.

During a trip to Omaha, I heard money manager Raffaele Rocco retell an old parable…

There once was a king who wanted to repay a local sage for saving his daughter. The king offered anything the sage wanted. The humble wise man refused.

But the king persisted. So the sage agreed to what seemed like a modest request. He asked to be paid a grain of rice a day, doubled every day. Thus, on the first day, he’d get one grain of rice. On the second day, two. On the third day, four. And so on.

The king agreed… and in a month, the king’s granaries were empty. He owed the sage over one billion grains of rice on the 30th day.

I have heard other versions of this story, but I like it because it shows you two things. The first is obvious: It shows how compounding can turn a little into a whole lot.

But the subtler, second lesson comes from working backwards. If the king owes one billion grains of rice on the 30th day, how much does he owe on the 29th day?

The answer is half that, or 500 million. And on the 28th day, he pays half again, or 250 million.

So you see that returns are back-end loaded. This is 100-bagger math. The really big returns start to pile up in the later years.

And we know the benefits of holding from our discussion above: It’s low-cost and tax-efficient.

These two factors alone—a concentrated portfolio and low turnover—are important ingredients to beating an index and amassing serious wealth.

Regards,

Chris Mayer
Editor, Chris Mayer’s Focus

P.S. Owning a concentrated portfolio and letting it compound over time are also key parts of our project at Focus.

Now, I’m taking it one step further—and developing a project designed to show ordinary people how they can identify and invest in companies that result in 10,000% returns.

Recently, I found a company that fits this model. It’s a small drug maker that has a treatment for America’s opioid crisis. It has the potential to disrupt the industry. And if I’m right, it’ll make investors a small fortune. You can learn more right here.

MAILBAG

In a recent update, Palm Beach Confidential editor Teeka Tiwari told his subscribers that he’s been receiving hate mail from people upset about the recent volatility in the cryptocurrency market (Palm Beach Confidential subscribers can listen to the update here). Subscribers jumped to his defense…

From Merrill A.: It bothers me to hear people are sending Teeka hate mail. No one forced us to get into the crypto market and he warned us of the extreme volatility. I’m down as of right now but I’ve followed his advice. And I believe this is a great opportunity to make a profit. Hang in there, Big T.

From Todd E.: I want YOU to know that I’ve been an Infinity member from Day 1. You keep telling us to be patient… To calm down and just ride it out.

I want you to know—I HATE seeing you write these messages. Not because you suck…  but because you ROCK.

That’s right… You’re awesome. These greedy morons don’t appreciate all you do for us, including sacrificing time from your family to research all over the world. Screw ’em.

I’m grateful for all you have done to change my life. I had lost over $1 million in the stock market and you have given me another chance. I’ve made my money back. I was up over $1 million back in January. With the pullback, I’m down to about $250,000. But that’s not your fault. I also pulled out over $200,000.

I’m still way up. Thank you.

From Kathleen B.: I’m sorry to hear Teeka is getting hate mail. For your information, I’m a very happy subscriber, even though like others I have watched my portfolio drop significantly.

I feel you have told us from the start that this is a bumpy ride… And that your strategy is for the long haul. I thank you so much for your constant and detailed updates. I became an Infinity member because of you. You’re doing a terrific job and I appreciate you very much!

From Elmer H.: I’m down 60% on my multimillion-dollar crypto portfolio. I understand how volatile the crypto markets are. I can’t predict the market swings perfectly. I believe the trend in the crypto markets is up. Therefore, I’m proud to be a Teeka subscriber.  

As a retired CEO of a major company, I, too, took a lot of flack along the way. Keep your sanity when the “hate” mail comes. Hang in there!

From Carolyn H.: Teeka, you’re my hero. What is wrong with these whiny people? I’ve slowly upped my basis to $1,000 per idea you recommend. (Who knew I would get so brave after my initial $500 ether investment?) And I’m still $100,000 ahead, even with the pullback.

Thanks for putting up with all of us and staying in constant contact. You’re quite amazing. Aloha.

From Dave B.: I totally get what Big T says about the long game. I wish I had him back in the 1990s because I knew there were fortunes being made but I had no coach. I’m not sending hate mail… but thank you mail. I only wish I had more to put in.

From Paul K.: I feel bad every time I hear that Big T is getting hate mail. So I thought I’d write a quick note. I think you’re doing a fantastic job and I look forward to every email and video you send. From the very beginning you have drilled into us the concept of holding on through the volatility to reap great rewards… And it’s paying off. I have already made tens of thousands of percent gains and I’m looking forward to the next ride up! Keep up the fantastic work and your amazing attitude.

If you want to send questions or comments to Teeka or his team, click here.

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