2 years ago



8 100-BAGGERS some new

8 100-BAGGERS some new insights, since our computing horsepower vastly exceeds what was available to Phelps. At the start, too, I wanted to write a new book around the study, to be called 100-Baggers. I’d dedicate the book to the old man, Phelps. So here we are. An Everyman’s Approach to Huge Profits in Stocks When I was younger, I had strong preconceptions about what great investing was all about. It was long-term, focused on the fundamentals and somehow a branch of Benjamin Graham and David Dodd’s celebrated book called Security Analysis, a tree that yielded Warren Buffett and so many other great investors. If you weren’t part of this intellectual tradition, you were just doing it wrong. I’m not so doctrinaire anymore. I’ll admit there are lots of ways to make money in markets, just as there are many different ways to make a really good pizza. Nonetheless, there is something to be said for a really good pizza that almost anyone can make with the right ingredients. In the markets, you can find all kinds of crazy success stories, such as the improbable traders of Market Wizards fame—including Jim Rogers, Paul Tudor Jones and Michael Steinhardt—or the oddball dancer Nicolas Darvas, famous for his book How I Made $2,000,000 in the Stock Market, with its equally odd system. These never interested me, for many reasons, but one big reason is they struck me as freakish. The gains were enormous, but the process was not replicable—certainly not by the everyman. I had a hard time believing anyone using insights from such financial freaks could really get anywhere. More likely, I imagined, following such a path would lead to ruin. But here is where Mr. Phelps is different. As you’ll see in the next chapter, anyone can invest in a 100-bagger—and many ordinary people have. Anyone can find them—or find close-enough approximations. After all, who is going to complain if you only turn up a 50-bagger, or even a 10-bagger? Heck, most investors I know are delighted when they double their money in a few years.

INTRODUCING 100-BAGGERS 9 Studying some of the great successes and the principles behind 100-baggers will help in the effort to find winning stocks today—not only 100-baggers. Before we get into that, which is the meat of the book, I want to discuss some elements of the study itself. The Study: 365 Stocks That Turned $10,000 into $1+ Million Our study also turned up 365 stocks (by coincidence, the same number Phelps found in his study covering a different time period). This would be the main population of stocks I poked and prodded in the six months after we created the database. I want to say a few words about what I set out to do—and what I don’t want to do. There are severe limitations or problems with a study like this. For one thing, I’m only looking at these extreme successes. There is hindsight bias, in that things can look obvious now. And there is survivorship bias, in that other companies may have looked similar at one point but failed to deliver a hundredfold gain. I am aware of these issues and others. They are hard to correct. I had a statistician, a newsletter reader, kindly offer to help. I shared the 100-bagger data with him. He was aghast. He related his concerns using a little story. As he wrote to me, Let’s say I am curious to find out what it is that makes basketball players so tall. So I take DNA and blood samples from the starting lineups of the NBA teams. There’s something huge missing here, which is—all of the non-tall people! And this is, of course, true—to an extent. I’m only looking at 100-baggers, not stocks that didn’t make it. However, what I’ll present in this book is not a set of statistical inferences, but a set of principles you can use to identify winners. If you’ve read Michael Lewis’s Moneyball, which looks at the principles behind productive baseball players, you know this is a worthwhile exercise.

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