Masters Series: Businesses That Can Make You Rich

Businesses That Can Make You Rich
By Bill Bonner, chairman, Bonner & Partners

Finding good companies requires a different skillset, different personality, and talents that I don't have.

So, in this report, I draw heavily on Chris Mayer. Chris is one of the best stock pickers in the game, and we're proud to have him as Bonner & Partners' newest expert. He seems to have what I lack: the desire and ability to find winning stocks.

I've known Chris Mayer for more than a decade. I knew he was doing good work, and that he had almost developed a "cult" following among his devoted readers. But it was only when I saw the results of an internal audit that I finally put two and two together.

Over the last 10 years, Chris' stock selections have beaten almost everyone and everything... including Warren Buffett, famed hedge-fund managers Carl Icahn and John Paulsen, and even mortgage finance wunderkind David Einhorn.

Why not follow Chris myself?

This is the question I always wanted to ask myself: "You claim to have such great investment advisers on the payroll. Why publish their recommendations and charge peanuts? Why not just use it yourself and make a fortune in the market?"

The answer is this: Great investments are not secrets that someone whispers in your ear.

Investing is a journey, not a destination. And finding good companies to buy is ongoing, hard work... the result of searching, studying, and learning.

I have been extremely fortunate. For more than 35 years, I've been paid to look. Even better, I've been able to pay others to look for me. And even with the best analysts in the world on the job, you're still never sure.

Maybe this one's found a dud. Maybe that one's technique is wrong. Maybe the market has changed. Maybe it is all luck. After all, that is what many Nobel Prize-winning PhDs believe.

The old-timers have a saying: "You can be sure that a crackerjack analyst's luck will change the day you start following him."

And yes, Chris himself says there was a good deal of luck involved in his success. But as Napoleon said, "I don't want smart generals. I want lucky generals."

There is a whole industry of analysts who try to figure out how to make above-market rates of return over a long period of time. A mountain of studies have been published. A fortune in research money has been spent.

"What investors should do is focus on the business, not on the stock market," writes Chris Mayer in 100 Baggers. The book is a look at how people make fortunes in the stock market. Peeking ahead: it is by buying good companies and sitting tight.

100 Baggers is one of those "$25 books" that George Soros was talking about when he said: "You can make $1 million from a $25 book." And as the title implies, the key is to find companies that go up, in a BIG way for a LONG time.

A Visit to the Holy Land

A few years ago, I got an e-mail from a woman inviting me to attend her 60th wedding anniversary celebration in Israel. I had never met the woman, so I quickly declined. I have to do enough travel already; I don't want to do any more.

But the woman did not give up. She sent me a handwritten note telling me how much it would mean to her husband (a longtime reader of my e-letter) to have me there. She offered to pay my expenses, not only for me but for my wife, too.

The personal approach worked. The family was originally from Baltimore, so I felt a local connection. Besides, I had never been to Israel; this would give me an opportunity to see it through the eyes of people who live there. I said yes.

It turned out to be a wonderful trip... full of interesting family stories and guided visits to important sites, such as Jerusalem, the Dead Sea, Jericho – all seen through the eyes of our Jewish hosts.

It was also a very expensive affair... with dozens of guests and family members, most coming from America. I wondered about the source of the family's money. Our host explained:

I was managing money in New York in the early '60s. It wasn't going too well. My partner left to do something else. And I was ready to do something else, too. But we had this money we had raised. We had to do something with it.

We could have given it back to the owners... but I met a guy who was starting up. He had the same idea we had about how to invest money. He was still looking for money to invest. So, I turned it over to him.

No one had ever heard of him, but his name was Warren Buffett.

Chris Mayer gives us an idea of the power of that single decision. Quoting from Value Investor Insight:

Imagine if a friend had introduced you to Warren Buffett in 1972 and told you, "I've made a fortune investing with this Buffett guy over the past 10 years, you must invest with him."

So you check out Warren Buffett and find that his investment vehicle, Berkshire Hathaway, had indeed been an outstanding performer, rising from about $8 in 1962 to $80 at the end of 1972. Impressed, you bought the stock at $80 on December 31, 1972.

Three years later, on December 31, 1975, it was $38, a 53% drop over a period in which the S&P 500 was down only 14%. You might have dumped it in disgust at that point and never spoken to that friend again.

Yet, over the next year, it rose from $38 to $94. By December 31, 1982, it was $775 and on its way to $223,615 today – a compounded annual return of 20.8% over the past 42 years.

What If the Sky Falls?

I believe we are in for a rough spell in the stock market, but I'm not going to take stocks completely out of my portfolio. Instead, I'm going to try to improve my performance by relying on Chris' research.

It would be tough to find anyone better. Chris has built up quite a track record over the last 10 years, registering an average annual return of 17.5% – handily beating the broader market two times over.

The point is, there is almost always some room in an investment portfolio for stocks.

Maybe they'll go up. Maybe they won't. But they shouldn't be completely ignored.

When the economy is healthy and stocks are cheap... you should have 50% or more of your portfolio in them.

When the economy is fragile and stocks are expensive... you want to reduce your stock market exposure down to 30%... or even 10%, depending on your circumstances.

Generally, the more time you have (the younger you are), the more you can invest in stocks knowing that you can recover from severe drawdowns. As you get older, or closer to the time you will need the money, the less you want to take chances. Move to gold... and cash.

Enjoying a Boom, Prepared for a Bust

Barton Biggs had an interesting approach. He was a catastrophist who wrote a number of books on the disasters of the World War II era.

His view was that stocks usually did well... until there was a disaster. So, most of the time you want to be heavily invested in the stock market. But occasionally, you will need to make a run for it.

His solution was to stay 75% invested in equities, but take some of the rest of the money to prepare for calamity.

He suggested buying a farm or a ranch and stocking it for survival. In a real crisis, he maintained, your stock portfolio will be the least of your worries.

Regards,

Bill Bonner