Masters Series: How to Find the Next 100-Bagger in the Market, Part II

How to Find the Next 100-Bagger in the Market, Part II
An interview with Chris Mayer, editor, Chris Mayer's Focus

Sam Latter: You're known as a big-time contrarian. Can you share some of your contrarian investment rules?

Chris Mayer: Sure. When it comes to 100-baggers, there are a lot of rules that I don't follow. I don't invest for dividends, I don't recommend diversifying your portfolio, I don't use stop losses, and I don't rely on stock market forecasts and news.

Sam: Let me address these one at a time. We've read over and over that dividends are the primary way for most investors to make big gains in the market over a long period of time. Is that not true?

Chris: Dividends are important for the return that you get on most stocks, yes. But if you're looking for 100-baggers, you want to focus on companies that are taking their profits and reinvesting them back into the business. If a company pays a dividend, it has less capital to invest.

A lot of the 100-baggers didn't pay substantial dividends until late in the game. Even though McDonald's started in the 1940s, it didn't pay its first dividend until the late 1970s. Most of these companies take their profits and plow them back into growth opportunities. Then as the growth starts to level off, they start to pay rich dividends.

Sam: The second rule you said is a strange one for anyone who has been a longtime Stansberry Research reader. You said not to diversify. You said that a lot of the 100-baggers suffered big drawdowns. Why don't you recommend diversifying? What is the ideal number of stocks for an investor to hold in his portfolio?

Chris: When most people diversify, they own 1% of this and 1% of that. A financial adviser will spread you out in all kinds of buckets. This simply ensures you get mediocre returns.

If you really want to earn a high return in the market, you have to focus on your best ideas. That's the way many of the great investors got there. Plus, practically speaking, how many stocks can you truly follow, and how many good ideas are there at any given time? Even though we're late into this bull market cycle, all you need to do is find a dozen great ideas out of 7,000 or 8,000 stocks.

Ten to 15 stocks is a good number. In my personal portfolio, I have seven positions. I don't recommend owning 30 or 40 stocks. Focus on the best ideas and ride those names.

Sam: Your third contrarian rule is not to use stop losses to protect your portfolio. For risk-management purposes, if you suffer big losses on a few positions and you only own 10 or 15 stocks, that can be a big chunk of your portfolio. Why do you recommend not using stop losses in your Focus newsletter?

Chris: Well, you have to choose carefully. Again, I have a very tight filter, so I'm not investing in stocks that have a lot of debt. I'm recommending stocks that should not be permanently impaired, even if they suffer a big drawdown.

It goes back to the 100-bagger study. You can't earn those kinds of really large returns unless you're willing to let the stock run, and you can't let the stock run if you're going to be stopped out every time the market or the company goes through a periodic drawdown. The focus is on the business itself, and if that's still profitable and growing, and if your thesis is still in play, there's no reason to sell it on a pullback.

Sam: Your name is familiar to many Stansberry Research readers, and we've seen your impressive track record over the years. Over a 10-year period, your returns beat some of the world's greatest investors, like Warren Buffett, David Einhorn, and Carl Icahn. I have to ask... Why are you sharing your investment tips with readers rather than earning millions of dollars on your own?

Chris: I get that question a lot. They want to know why I'm not running a fund. And it's true – if I only cared about money, I could make more by running a fund. I've had offers to join money-management firms. I've been offered as much as $1 million a year to do so.

But I earn a pretty good living doing what I'm doing now. And other aspects of life are important to me. I get to write about and research whatever I want. I work mostly out of my house. I enjoy my lifestyle, and money management isn't the picnic people think it is. I know a lot of money managers who spend most of their time raising assets and holding their clients' hands. They don't spend much time actually investing. I spend probably 90% to 95% of my day investing and researching. It's what I love to do.

Sam: Earlier this year, Agora founder Bill Bonner did something he had never done before and invested $5 million of his family's money into your recommendations in your Bonner Private Portfolio newsletter. How is your strategy different in Focus?

Chris: Well, in Bonner Private Portfolio, our primary goal is that we don't want to lose money. We invest in large-cap companies to create a safe, low-risk portfolio that we can hold on to for years.

With Focus, we're more aggressive. We're investing in smaller-cap companies. The market is full of interesting growth opportunities in companies with a market cap of less than $3 billion. That's what Focus is built on – looking at the 100-bagger study and applying lessons I learned there to generate exceptional returns.

Sam: For people who are interested in learning more about the 100-bagger idea, is there anywhere we can go to read more about this type of investing?

Chris: There are two places. First, in 1972, Thomas Phelps literally wrote the book on 100-baggers. It's called 100-to-1 in the Stock Market. His study covers stocks that went up 100-fold from 1932 to 1971. It's well-written and it inspired me to dig more into 100-baggers.

Second, a reader once suggested that I update Phelps' book. That's where my book 100-Baggers comes in. It came out last September. Those books are included as part of a subscription to my Focus newsletter.

Sam: Great. One other thing... You've made your first recommendation in Focus. I don't expect you to be able to reveal the name of it, out of fairness to your subscribers, but can you tell us a little bit about the company?

Chris: This first company is a jewel. We talked about the power of having an owner-operator at the helm, and in this one we have a special guy. Not a lot of people know him, but he's incredibly talented, and the stock is still small, even though it's up more than 10-fold over the last several years. And it's still a good value.

It has about 0.5% market share of its industry, so it has lots of room to grow. And the business itself is one that checks all our boxes. It has a high (and growing) return on capital – just over the last few years, its return on capital has grown from around 15% to 25%, and it could still grow from here. This company also has plenty of cash and no debt. Readers who get in early on Focus are going to earn their money back on the subscription in this one name.

Sam: Any final thoughts?

Chris: People can be very cynical about newsletters, but I really enjoy helping readers find these stocks and make great returns. Over my many years of doing this, I've become friends with a lot of readers. When I travel, sometimes I'll stop and visit with different readers. What I want to do with Focus is help an elite, small group of readers who are interested in this kind of investing and want to become better investors.

That's why I'm really excited to launch Focus. I've been thinking about launching a product like this ever since I first read Phelps' book back in 2011. I thought it would be great to build something around this idea, and Focus is the fruition of all that effort. I hope readers benefit.

Sam: Well, Chris, thank you for joining us. You've been very generous to speak with us. Thank you so much for taking the time.

Chris: Of course, thanks. I always like talking about this kind of thing. Take care.