I have just finished reading 100 Baggers by Chris Mayer. It was a fascinating read.
Chris admits that it took him a quarter of a century of reading, thinking and making lots of mistakes before he really got it. He worked out what it takes to invest in a business and make a return of 100 times your investment. Hence the title of his book – 100 Baggers. In a blog posted by Chris in January this year, he explains his theory.
He talks about the greatest investors of all time mentioning the likes of Warren Buffett, Peter Lynch and John Templeton. He then discusses entrepreneurs such as Jeff Bezos, Bill Gates and Steve Jobs. These are hugely successful entrepreneurs whose names are synonymous with some of the greatest companies today namely Amazon, Microsoft and Apple. He makes the point that the returns on these shares beat virtually all fund managers.
I decided to check it out for myself and I discovered that Amazon’s share price has risen from $1.73 on 16.5.97. when the company floated on the New York Stock Exchange to $3,344.94 on 6.8.21. That’s an increase of 193,249% in a little over 24 years.
That’s a great return. How did Jeff Bezos do it? He owned a great business and didn’t sell. Why don’t investors and fund managers do the same?
Nicholas Sleep, who managed Nomad Investment Partners from 2001-2013 and produced a net return of 18% annually wrote about Wal-Mart in one of his series of letters:
“Investors are broadly rational people (they all knew that Wal-Mart was a wonderful business) and fund managers operate under healthy profit incentives that ought to foster good outcomes, so why is it that no one but the founding Walton family owned Wal-Mart all the way through?”
This is a really great question and there are many possible answers to it. Sleep continues:
“It could be argued that lots of things had to go right for Wal-Mart to grow for forty years. That is certainly true but, at its heart, a very few simple things really mattered. In our opinion, the central engine of success at Wal-Mart was a thrift orientation fueling growth with the savings shared with the customer. The culture of the firm celebrated this orientation and reinforced the good behavior. This is the deep reality of the business. This should have had the greatest weighting in the minds of long-term investors even if other things looked more important at the time. Instead investors may place too much emphasis on valuation heuristics, or margin trends, or incremental growth rates in revenues or any of the list above, but these items are transitory and anecdotal in nature.”
My recent blog The key to Amazon’s enormous success explained this scale-economies-shared model.
The answer to Sleep’s great question, then, seems to be that investors put too much weight on factors a business owner does not. A business owner seems to have a different set of concerns, focused instead on the “central engine of success” of the business and the culture that keeps it alive and thriving.
So it appears that it is far better to focus on the performance of the business rather than all of the stock market analysis of it and the economic and political environment. In other words, focus on the business’s performance rather than all of the surrounding noise.
However, to invest this way requires a complete change in mindset of the investor and fund manager.
Anyway, part of that change in mindset means a total change in the way you filter, process and weigh information. Look away from the economic forecasts, the quarterly earnings guesses, the precise valuation models, the charts, the news… instead ascertain what the “very few simple things” that really matter are and focus on those.
The great news is that as fund managers we have a major advantage. We can invest in more than one great company and we do. We know that if we invest in these types of companies long term then we are much more likely to invest in future 100 baggers like Amazon. The great news is that we already invest in a number of visionary founder-run businesses and we will continue to do so.
It’s the power of compounding. You know it makes sense*.
*The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change.
