I'm going to expand this into an article in the next week or two, but first I'd like some feedback. (Pardon me if this draft is messy and disorganized.)
I'm inspired by the hunt for stocks that might rise 10x in 10 years, or 100x in 20-30. They exist.
Is it possible to identify a company with better than 50% odds of rising so much? No.
But within the 6-10 bets I place in my portfolio I believe I'll nail a couple that rise 10-100x.
The universe of what won't work is large. Knocking out huge chunks of that universe will help make your search for 100-baggers easier. - Christopher W. Mayer, in his book on 100 Baggers
To understand Mayer's point think of heart attacks. Your job is to find a guy who is gonna die of one in the next year.
20 out of 10,000 Americans are killed by heart attacks each year (10,000 is a convenient number for context since there are roughly that many stocks listed in the US).
Heart attacks are rare. (Bear with me as I invent some numbers.)
But 30 out of 10,000 men will die, some being a man is a risk factor that increases your odds by 50%.
And 200 out of 10,000 men older than 80 will die, so the combination of sex and age increases your risk by 1,000% relative to the general population.
Now suppose we're talking about an old guy who is 6' 3", 280, with a family history.
The point is that dying of a heart attack soon is rare no matter who you are, but the odds can easily rise 10-1,000x when combinations of risk factors exist.
Lots has been written about the happy risk factors associated with extreme price rises in stocks. They include:
- Very low starting valuation, i.e. certain banks in 2009.
- Very high ending valuation, i.e. tech in 2000.
- Fast sustained sales growth, either from the growth of a market (Intel, chips), or from continual reinvestment organic (Walmart) or inorganic (Comcast).
- Sustained growth in margins.
- Long high ROIC reinvestment runways.
- Visionary leadership by a founder owner-operator, etc.
- Proprietary technology.
I'm most interested in the factor I bolded - I want to find some more companies run by brilliant, manic, visionary studs; either founders who have stuck around, or otherwise CEO's who own tons of stock.
Why? Because, a) that seems a pre-requisite for outstanding long-term success, whereas the other factors are nice to have but not necessary individually, b) investors who have a track record of nailing 100 baggers emphasize leadership, and c) it's fuzzy thing that we can analyze but that can't be easily captured by our quantitatively oriented competition.
My lowest entry point in Bank of Internet (NASDAQ:BOFI) was $4 in 2009; my highest exit was $140 in 2015. The guy who runs that bank may not be a nice guy, if a disgruntled former employee is to believed, but it's long been obvious he is brilliant, and ruthlessly ambitious.
Walter Woltosz who runs Simulations Plus (NASDAQ:SLP) is also brilliant, and ambitious, but more in the Silicon Valley, change the world with technology, sort of way. He worked on computer modeling in aerospace design in the 1970's, later invented Stephen Hawking's speaking tool which formed the basis of the first company he founded, and then he dedicated himself to SLP, which is about using computer programs to predict from the properties of molecules (weight, composition, charge distribution) how they'll affect bodies, organs, and diseases.
SLP has many, many 10-100 bagger risk factors including owner-operator leadership, network effects, fat margins, many reinvestment opportunities, and its market (drug simulation) is still tiny compared to its potential.
I'll mention one more that's more about proprietary technology and market growth potential. eMagin (NYSEMKT:EMAN) makes microdisplays - TV screens the size of nickels, packing millions of pixels. The market is set to boom with consumer Virtual and Augmented reality devices. Further, EMAN displays use an architecture, OLED, that performs best but is young, very expensive, and hard to manufacture. Their market cap is under $100m, and they've got a nice secure core in the military domain. There's massive potential here.
Gun to your head, what 3 of your stocks are the most likely to rise 1,000% in the next 10 years. (Don't just tell me your favorite. I don't care about margin of safety and guaranteed 50% upside. I want lotto ticket potential.)
And what company - it could be one you don't own because of valuation - is led by the most remarkable founder, or owner-operator.
Thanks for the help!
Disclosure: I am/we are long SLP, EMAN.