To make money in stocks you must have "the vision to see them, the courage to buy them and the patience to hold them." Patience is the rarest of the three. – Thomas Phelps (original quote: George F. Baker)
Do you have what it takes to catch a monster?
Thomas Phelps wrote one of the all-time great investing books titled '100 to 1 in the stock market' after studying companies that had returned 100-fold or more to investors over the previous few decades (investing trivia bonus point: the legendary Chuck Akre names Phelp's book as core to his philosophy).
These 100-to-1 businesses were so incredibly successful that if you had invested just $10,000 in one of them, it would have turned in to a $1,000,000 fortune over time. Phelps found 365 companies that reached the prized 100-to-1 level or higher, and among those incredible winners he found four common attributes.
First, they almost all started out small – giving them a lot of room for future growth. Second, they were relatively unknown at the outset – less analyst coverage meant lower starting prices. Third, they almost all had a unique product or competitive advantage – something which gave them an edge over other firms. Fourth, the companies were headed by smart, research-minded management teams.
In Phelps view though, more important than what made the companies special, is what made the investors who hung on special. The shareholders that, despite all the noise, and despite all the emotion, were patient enough to hold on throughout the share market's volatility to reach that prized 100-fold return. These were investors that managed to master their inner monkey brain.
Let's look at what it would have taken to hold on to a modern version one of these mega-winners as detailed in '100 Baggers' by Christopher Mayer.
Over the 21 years through last October the shares of Monster Beverage (NASDAQ:MNST)— the beverage company best known for its large cans of Monster brand energy drinks — increased in value by a mind-numbing 2,400-fold. That is almost too big of a number to wrap our heads around, so let's put it like this: for every $10,000 investment in 1994, shareholders that held on would be sitting on $24,121,512.
In 1994 that $10,000 might have bought them a decent second-hand car, after investing in Monster Beverage it would buy them a helicopter to go with their cliff-top mansion.
How did Monster Beverage do it? The company started off very small and was overlooked by Wall St for a surprisingly long time. Monster also invested heavily in marketing and innovated in product, being one of the first companies to recognise the demand for a larger energy drink can (a part of the market that red-bull had neglected). The management team were also incredibly savvy, building a capital-light business model that allowed them to iterate and scale quickly.
The biggest question though, is how did the investors do it? Think of all the times a shareholder had to resist selling if they wanted to reap those 2,400-to-1 long-term gains. Even assuming they could resist selling somewhere along the line for a gain of 40%, 400%, or even 4,000%(!), they also needed to deal with all the volatility that came along with the ride.
During Monster Beverage's run there were 10 separate times where its share price fell more than 25%. Even worse, in three different months Monster Beverage's shares lost more than 40% of their value. Think of the courage it took to hold on to your huge winner when the shares fall by 40% – in a month!
Returns of the kind that Monster Beverage reported are extremely rare. But the lessons of such mega-winners apply to all great long-term investments. To catch a monster, we need the vision to find, the courage to buy, and the patience to hold. Patience is often the toughest of the three.