David Poppe: Why Investors Miss Out On 100x Multibaggers

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In his latest shareholder letter, David Poppe of Giverny Capital discusses the reason why investors miss out of 100x multibaggers. Here’s an excerpt from the letter:

A few months ago, a client recommended a book to me called “100 to 1 in the Stock Market.” Written in 1972 by Thomas W. Phelps, a former Wall Street Journal and Barron’s editor whose career following the markets began shortly before the 1929 crash, the book is a manifesto for buy-and-hold investing and for common sense optimism.

I haven’t been a big reader of investment books for many years. Charlie Munger once said there are two kinds of people who make money at a bass fishing tournament: people selling tackle and advice on catching fish and people who know how to catch fish. I didn’t think I needed any more fishing poles, so it took me some time to pick up this book.

I’m glad I did. Phelps marvels that over the course of his career in finance some 365 different US stocks had appreciated by at least 100 times their value. While the early 1930s represent a profound bottom for the stock market, and the early 1970s a top, he wasn’t really cherry picking.

For a stock to rise 100-fold over 40 years requires an annual compound above 12%, which is hard to maintain no matter how you choose your start and end points. Further, many of the stocks he cites rose 100-fold from their initial public offerings, not from some multi-year low.

If we just looked at the decade of the 1950s, a surprising number of companies that went public then had risen 100-fold by 1971: Diebold, McDonnell Aircraft, GEICO, Henry Holt & Co., Texas Instruments, Georgia Pacific, Walt Disney, Avon, Emery Air Freight, Baxter Labs, Occidental Petroleum, Xerox and Monroe Auto, to name some of the more recognizable ones. The alert reader will note that a number of these continued doing well for decades after 1971.

For the record, for a stock to rise in value by 100 times in a 20-year period, it must compound at 26% annually. To rise 100-fold in 15 years requires a 36% annual return.

Phelps makes two points: First, the way to really succeed in the stock market is to buy fine businesses and hold them. There are 100-to-1 opportunities all around us, but even at the end of his investing career Phelps knew surprisingly few people who had ever held a stock long enough to earn a 100x return. Most people are too impatient. They sell their winners, paying taxes, and move on to the next idea. Often, he notes, they sell simply because the stock has gone up so much that they fear looking foolish in a correction.

Second, and ultimately more profound: there is something unfortunate about Americans, or maybe about people, that render us distinctly afraid of the future. This despite the fact that the country, its people and its businesses, however imperfect, keep making progress.

In 1972, Phelps put it better than I ever could: “Year after year, mankind achieves the impossible but persists in underrating what it can and will do in the future. … Some bureaucrat advocated closing the patent office a hundred years ago because everything had been invented. Rodgers and Hammerstein put it to music 80 years later: ‘Everything’s up to date in Kansas City. They’ve gone about as far as they can go.’ … Every day we crisscross the Atlantic Ocean with airplanes of greater tonnage than the Mayflower.

We have proved and put to practical use Einstein’s equation that energy equals mass times the velocity of light squared. We have turned the dread sonic barrier – the speed of sound – into a speedometer gauge. … Yet like birds making their first flight, the higher we rise the more terrified we seem to be that we shall surely fall.”

I am not a Pollyanna. I watched the riot in Washington, D.C. on January 6th with feelings of anger and dread. “A Republic, if you can keep it,” said Benjamin Franklin. We have suffered grievous harm as a society over the past few years and have much work to do to heal wounds and reestablish a realitybased narrative of government and, sadly, of life.

As for business, I will always remember the Walmart executive who said, only half-jokingly, that the retail colossus made progress like an 18-wheeler on a highway, steering from ditch to ditch. Running a business is hard work. Failure is always a possibility. And progress comes in fits and starts while people prefer predictability. But in fact, investors get paid for tolerating volatility. The highway takes us forward, not backward, so long as we retain the will to extract ourselves from the occasional ditch.

You can read the entire letter here:

Giverny Capital FY2020

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