Two Keys to Building a Portfolio of 100-Baggers
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.
According to Christopher Mayer’s book 100 Baggers, Berkshire was the top performer in picking stocks that returned 100-to-1 from 1962 to 2015.
Berkshire’s 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.
The outperformance of Berkshire and the other 100-baggers mentioned in the book affirms that not only can you beat the market, you can leave it miles behind.
There are two important factors you need to consider if you want to achieve that kind of outperformance. Let’s get to them.
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.
Legendary investor Warren Buffett, as is well known, doesn’t hesitate to bet big. His largest position is frequently one-third or more of his portfolio. Often, his portfolio would consist of no more than five positions.
For example, there’s 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.
Buffett’s business partner, the late Charlie Munger, was also famous for his views on concentration. He’s had the Munger family wealth in as few as three stocks.
The book Concentrated Investing also includes profiles of investors who ran such concentrated portfolios. These include Buffett and Munger, along with John Maynard Keynes, Lou Simpson, Claude Shannon, and more.
- 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.
- 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’s 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.
You may have hear of the old parable about 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 1 billion grains of rice on the 30th day.
This parable 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 backward. If the king owes 1 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 amassing serious wealth.
Palm Beach Research Group
This article was originally published on this site
