First things first, what’s a “100 Bagger”?

A 100 bagger means the invested amount of —

$10,000 becomes $1million…
$1million becomes $100million…

In short, whatever you invest, multiplies by 100. And if you can pick such stocks for just 2 or 3 times in your life, you don’t need to read my blogs 😁

So how do we find 100 baggers? How much time does it take? What all things to look for in a stock/business that has potential to generate a 100 bagger?

The book — “100 Baggers: Stocks That Return 100-to-1 and How To Find Them” by Christopher W Mayer has those answers for us.

Lets see what are the 5 takeaways from the book “100 Baggers: Stocks That Return 100-to-1 and How To Find Them“

In this book, Chris (I have read this book so many times that now I know him well enough to call him Chris 😉) has laid down various case studies of stocks that went over 100 times between the period of 1962 to 2014. And he has emphasized on factors that caused these stocks to increase 100 folds.

BTW ,if you are a lazy ass who won’t read a book even if that has the potential to multiply your money 100 times, you are at the right place. Because I am here to summarize it for you. So without wasting a lot more characters in this blog, here are the 5 things to look for to 100x your money in stock investment:

Small Company:

Look for companies that are small in size. Companies with smaller market-cap. If you invest in big-sized blue chip company, the probability of making 100x is very low.

For you to make 100x your money in Apple stock today, in future the market cap of apple has to go over 200 trillion! And as of 2022, US GDP is around 23 trillion. So Apple’s market cap has to be around 9 times US GDP to become a 100 bagger. You get the idea, right?

On the other hand, if you invest in a company that has a market cap of $100 million, that company will have a higher probability of going to $10 billion.

Therefore you have to start small!!

High Return On Invested Capital(ROIC):

Return on Invested Capital means how much money the company is making on its invested capital. If the company has high return on invested capital and is able to re-invest profits while maintaining the same level of returns, it will be able to compound its company at a much faster rate.

Lets say there are two companies — Lemonade_A and Lemonade_B. And they both sell lemondade(obviously!).
Lemonade_A generates revenue of $100 & profit of $20 with initial investment of $20. Its return on capital is 100% ($20 profit on a $20 investment).

Lemonade_B generates revenue of $200 & profit of $40 but requires an initial investment of $100. Its return on capital is just 40% ($40 profit on $100 investment).

So even though the profit of Lemonade_B is higher than that of Lemonade_A in year 1, Lemonade_A requires much less capital to start a new store. It can re-invest $20 from the profit to start another store in just one year (remember it requires only $20 of initial capital for a store) and thereby double its revenue & profit in Year 2.

On the other hand, if Lemonade_B wants to start another store, it will have to wait at least 2 and half year to make to collect $100 of profit and start another store.

Thus Lemonade_A will be able to grow a lot faster than Lemonade_B. Lemonade_A’s management is much more efficient in allocation capital and generate profits than Lemonade_B. Therefore if we invest in Lemonade_A, we will be able to compound our money at a faster rate than Lemonade_B.

Similarly, we should not invest in companies that generate high revenues or profit but require a large amount of initial investment. Rather invest in stocks of those companies where management allocates capital well and generate high return on invested capital (Like Lemonade_A).

Low debt:

This is an easy one. Look for companies with low debt so that it is easy for the company to pay interest & principal amounts even during bad times like recessions without going bankrupt.

Management’s ability to allocate capital efficiently:

A manager has only these options to allocate capital:

1. Re-invest profits in business to expand its operations
2. Buy-back stock
3. Issue more stocks
4. Pay dividends
5. Raise debt
6. Pay down debt

A manager should be able to make an efficient decision on how to use company’s cash.

For example, if the manager is not able to find an opportunity to expand company operations & earn high rate of returns and ,at the same time company, the company’s stocks are trading at a much lower price than its intrinsic value, buying back stocks would be a smart way to use company’s cash.
On the other hand, if manager is able to find an opportunity to expand company’s business at higher rates of return, buying back stock or paying dividends could be catastrophic.

Imagine Steve Jobs deciding to buy back apple stock using cash instead of investing in developing I-phones!!

So deep dive into company’s history to see how the management has allocated capital in the past. And prefer investing in companies where management has made smart capital allocation.

Founder led & high insider ownership “preferred”:

If the founder of the company, who also has high percentage ownership in the company, is running the company, the founder will tend to focus on long term growth of the company instead of just satisfying quarterly targets for bonus & high cashout. Founder of the company also tends to take low cash compensation and has more skin in the game. The founder makes money only if shareholders make money. That is the best scenario.

On the other hand if a hired CEO is running the company, there compensation is tied to short term performance of the company and therefore they don’t care much about long term aspects of the company.

If you are still not convinced here are the examples: Jeff Bezos owned more than 10% of Amazon and we all know how amazon performed. Walton Family owned around ~50% of walmart shares and didn’t sell even a single share of walmart for a long time. And look at how Walmart stock performed.

Therefore, If you are able to find an ethical founder who has high % ownership of the company and is running company operations, you can be assured that the founder will focus on the long term growth.

This is not a hard requirement for 100 baggers but it will definitely increase the probability.

Conclusion/Opinion:

This list by no means is a comprehensive list that covers everything needed to make 100 baggers. Investing cannot be that easy!

But it definitely takes closer to a 100 bagger. And even if you cannot make a 100 bagger, by using this list you will definitely increase the probability of making a 10x,25x and 50x+ on your investment. It is better to fail forward.

However it also goes without saying that to achieve such high returns, you must be ready to hold onto your investments for a LONG time. 100 baggers are usually made over multiple decades.

It is nearly impossible to summarize this book in just 5 points, but I tried my best. I would encourage each one of you to read this book once. It has the ability to change your life.

Good luck — go grab your 100 baggers!!

*if you are looking for reading recommendations, here is the list of my recommendations : Click here