A book written by an old friend really set me thinking about portfolios.
Investment guru Christopher Mayer's 100 Baggers: Stocks that Return 100-to-1 and How to Find Them is a great read to liven up an otherwise boring month of August.
Could you really find the next Amazon, or Warren Buffett’s Berkshire Hathaway, invest US$10,000 and a couple of decades later have a million dollars?
Mayer dedicates his book to Thomas Phelps who wrote the first book on 100-baggers in 1972, and admits that one of his newsletter readers suggested he write an update.
It was not easy. Phelps had pulled off a "mission impossible".
Just compiling a list of every 100-bagger in the US stock market from 1962 to 2014 took a $50,000 research project. But it discovered 365 stocks that have achieved this feat.
So with the benefit of hindsight, Mayer could then reverse engineer and try to deconstruct these fantastically successful companies and determine just how they did it. Then the idea was to take this knowledge and apply it to current stocks and try to pick the next crop of big winners.
I suppose what makes this interesting is that Mayer has a tremendous track record as a stock picker himself. His average 17 per cent annual gain over more than a decade may not sound too exciting, but when you compound that performance year-on-year that is how you get some staggering growth in stock prices.
And indeed that is what it comes down to with these 100-bagger stocks. Somehow they managed to generate consistently high profits and reinvest these profits in their own businesses, year after year.
Over time it all adds up.
However, multiplying your money that much never comes quickly in this type of investment. You do have to wait at least 10 years, more likely 20 to 30 years, and if you picked the wrong stock to start with then tough luck.
Now 365 companies might not sound a lot, but this is a drop in the ocean compared with the thousands of possible stock picks.
Mayer expertly analyses what his 100-baggers have in common. One thing to remember is that you need to invest when the company is still relatively small. Apple, for example, as the world’s most valuable company, is not likely to grow 100-fold again.
Another key point is that most have owner-operators, that is to say the people running the company own a big stake in its future. Shareholders are along for the ride as business partners rather than merely as part of a corporate fund raising exercise.
Owner-operators are a magic ingredient who stick with the company through good times and bad.
Think Steve Jobs at Apple, although he was fired and came back, and Bill Gates at Microsoft. Their talent was crucial.
From the humble shareholder’s point-of-view the most important thing is to stick with the 100-bagger, whatever its short-term ups and downs.
Mayer gives an example of a guy who cashed in Berkshire Hathaway after its early success to buy a property and just how much that real estate actually cost in terms of this lost opportunity.
I was lucky enough to quizz Mayer over three balmy hot days in Budapest this month, mainly about his latest job which is running the family investment office of his former employer Bill Bonner, the owner of newsletter company Agora.
Mayer has to invest US$6 million of the Bonner family fortune. Meanwhile, this same portfolio is being offered as a monthly subscription newsletter, albeit at $3,500 per annum, one of the most highly priced in the business. Readers get to share tips two days before Mr Bonner himself is allowed to buy.
Since its launch just over a year ago, performance has been bang in line with Mayer's long-term average. That was something of a relief because he was a bit worried that Wall Street might crash just as the portfolio started buying, though that would not have mattered much in the very long run.
I’ve had a look at the “Bonner private portfolio”.
There is a short list of 13 stocks this month, including one new addition, and three gold funds.
Will these be the 100-baggers of the future? Mayer makes no such claim. He's a modest and unassuming guy and knows from his study that predicting such huge out-performance is really impossible.
On the other hand, like his employer I am bound to concede that he is likely to be a lot better at stock picking than me, and compounding his current average performance would deliver a handsome retirement nest egg for anybody.
Peter Cooper has been writing about investment in the Gulf for 21 years