Legendary scale gains are not myths – they happen – and they happen frequently to all classes of investors, including individual investors. Although I do not have a documented statistic to back up this claim, I would like to postulate that the vast majority of immense gains happen to individual investors. When I talk about immense, legendary gains, I am not talking about a double in a year or even a 400% in 6 months. I am talking about the gains that create real wealth – the mythical 10, 20, 50, and even 100-baggers. In terms of a percentage, that means real investment gains of 900%, 1,900%, 4,900%, and, gasp, 9,900% (give or take a few percentage points), respectively. Of course, not to downplay a 4x in 6 months – phenomenal return to say the least and certainly a wealth builder.
Anyway, in regards to such legendary returns, statistically, they happen – and not all of them take 100 years to materialize. Need examples? Merck & Co. (NYSE:MRK) became a 100-bagger in about 30 year time; Seaboard Corporation (NYSEMKT:SEB) yielded a 20-fold gain in much less time – about 15 years; Middleby Corporation (NASDAQ:MIDD) saw a 100-bagger in the same 15 years; and Thomas Group (TGIS) has come close to the 9,900% mark in a mere 5-years time. I am sure the quants out there will point out all sorts of potential flaws in the above logic, such as Merck’s gains if dividends were re-invested or not or Thomas Group barely getting back to where it was in the mid 1990s where it saw about 95% of it’s market cap wiped out by the technology bust and subsequent crash of 2001. So, one could easily argue if you have been holding on to Thomas for 10 years, you would be up about 20% - hardly a stellar return…Or that Merck is still off about 20% from its mid-2003 highs and even further off from its all time high from back in 2001…And, oh no, I’ve gone cross-eyed.
In finding the next 100-bagger, ask yourself, are you willing to own the stock you buy or are you just hoping to be along for the ride? Incidentally, if you seek out a 100-bagger, you will be hard pressed to find one. There is absolutely no way you can have that type of a crystal ball, especially considering that many huge gainers take many years to materialize.
If you are looking to just ride the wave and find 100-bagger after 100-bagger, there are lots of elements that have to come together.
Part of it is timing – note that the vast majority of Seaboard’s gains took place in the past couple of years. Part of it is having the resolve to enter when things are not looking very exciting or risk is high and furthermore, holding on when things naturally retrace. Again, take Seaboard which hit $1,800 on multiple occasions in 2005 and 2006 – each time retracing and pulling back nearly 30% - except the last time. The subsequent double from fall of 2006 until today is where the real gravy train came in. Of course, if you bought in at $200, you would likely be more likely (thanks to fear and greed) to sell at $1,800 – or even sell at $1,200 after it fell from its $1,800 highs – or even sell on the way up at $600. Thirdly, if you are just looking to ride the wave, you need to have some good gambler’s luck on your side and be able to sell at the top or have some monster acquisition bring you to the promise land. So, to find a 100-bagger return, you need to perfectly time the market, be 100% immune to fear and greed, and have a bag of four-lead clovers up your sleeve. I do not know of any investor that has all of those going for them at all times – or even ever.
Regardless, there are lessons to be learned here as the real winners in the case of Seaboard (and the others) were not the traders, or the market timers, or the contrarians, or the extremely lucky – but the owners.
I am going to spare the usual chatter about things that obviously these companies that yield huge returns are made of. The basics are true: excellent management, shareholder friendly (via dividends, buybacks, lack of absurd stock option grants and awards), positive free cash flow effectively reinvested, and growing shareholders equity. Of course, all of these are true. Simply put, companies that yield those great returns are great companies. Even more simply stated, buy great companies if you want to be in the position for the legendary returns – and keep buying them.
Incidentally, the very nature of this line of thought will actually preclude you from getting the maximum 100-bagger type of return. Yes, maybe the first shares of Merck you bought at $0.50 split/dividend adjusted 30 years ago have seen 100 times their money, but the shares you bought yesterday at $52 are a ways off of showing a 100-fold return – or even a double. While nobody has the foresight to pinpoint the price of a stock 10 years from now, everyone can agree that it makes sense to continually increase your stake in a company that you own as long as the fundamentals do not change.
Consider an example closer to home – the small business where the owner made $10,000 the first year and is now making $500,000 per year of net income. The owner benefits from owning 100% of the rights to that net income, but had to endure some rocky terrain along the way, not to mention the sheer sweat equity, even if things were always smooth sailing. Although maybe the number of shares never changed during the years, effectually, the owner built his stake in the company by adding to it via new revenue lines, hiring new employees, and opening new stores – all requiring additional investment and expenditures into the business (e.g., buying more shares).
Finding the next legendary homerun stock is simple – become an owner and act like one by increasing your ownership participation. Even if buying more now is more expensive than it was a year ago, if the prospects are good, just imagine how cheap buying today will look like 5 years from now. Just make sure it is an owner of the right type of business.
Disclosure: Author has a long position in some of the above-mentioned securities.