[00:02:30] Chris Mayer: And so, yeah, I mean, the trickiest part was getting all the data together, so that took some time and money, and I worked with another analyst to help me kind of extract everything. And then, you know, we found about 365 names that had gone up at least a hundred times, which ironically is the same number that Phelps found in his study.

[00:02:55] Chris Mayer: And that was what we did. I mean, I had some market cap limitations, so I cut off some of the very smallest stocks. Because I was trying to get something that we could maybe see some predictable traits, you know, in the financials or in the business itself. So I took out those little tiny mining stocks that go maybe from like 15 cents to $15 or whatever.

[00:03:23] Chris Mayer: So that was basically the universe. And there were a lot of interesting things that I found. I guess we can get into those as we go along.

[00:03:34] Robert Leonard: A couple of the examples are Pepsi, Monster Energy, and Amazon, and it’s hard to generalize these three situations or scenarios because they were all so different.

[00:03:45] Robert Leonard: Amazon looked too expensive. Pepsi always kind of seemed underwhelming, and then Monster Energy just went through so many ups and downs. So I know it’s difficult to generalize, but what were some of the common characteristics that you found common to all the hundred baggers that you studied? 

[00:04:04] Chris Mayer: You said it very well. I mean, that’s one of the things too when I did the study. It was very hard. I thought going into it that I might be able to get kind of a template or I might be able to generalize what some of those things were. But as I got into it, yeah, they were very different. I mean, even in terms of margins, types of businesses, there were a lot of differences.

[00:04:36] Chris Mayer: But I guess if I were to really kind of force myself to think of some commonalities, and I talk about them in the book, one is, of course, the businesses all grew a lot. So, you know, all these businesses were much, much larger after their journey when they started. So, you know, you have to find businesses that are able to grow.

[00:05:01] Chris Mayer: And so, what are some of those key components of growth? Because not just growth, but you want profitable growth. You want growth that’s economic. And so I would say, you know, these businesses all generated very high returns or high returns on their capital, and they were able to sustain that year after year after year for decades.

[00:05:25] Chris Mayer: If you look at the whole population, it kind of formed this little bell curve, and most of the names fell in the, it took 20 to 25 years’ time, which is about 20 to 25% a year in annual compounding. So that kind of sets the parameters. Outside of that, then you have to have things like, I mean, you have to be able to survive all the ups and downs of the cycle.

[00:05:55] Chris Mayer: So, you know, many of the businesses had pretty good financials, you know, pretty good balance sheets, pretty good financial shape. Many of the businesses had some sort of entrepreneur behind them. So, this was another, not a critical theme. There were many exceptions, but it seemed like a lot of them had some entrepreneur.

[00:06:17] Chris Mayer: So, you know, you think about Walmart and you think about Sam Walton, and you think about Apple and you got Steve Jobs. And there’s always an, not always, but there was often an entrepreneurial force, at least in the beginning. It could be an entrepreneur or a family of some sort. So those were some of the things that they had in common.

[00:06:42] Robert Leonard: Talk to us a bit about how early an investor needed to be in these companies to get a hundred times their return, or a hundred times their investment. Did they have to buy into the company at the IPO? Could they get in a little bit after the IPO, or were there a bunch of opportunities throughout these companies’ history where an investor could have a hundred times their returns?

[00:07:11] Chris Mayer: Yeah, this is maybe a misconception people have, and they think they have to be in really early. But with these hundred baggers, you had many opportunities, and often you could buy them year after year. You could pay the 52-week high price for that year and the year after and the year after, and still make a hundred times your return.

[00:07:36] Chris Mayer: So yeah, I mean, the lesson there is it’s not so much about market timing or how early you were. I mean, there have always been stories, for example, with Berkshire Hathaway, even when it was not even halfway through the journey, where people would speculate whether it was already done or already played out.

[00:07:58] Chris Mayer: And so you have to resist those. I like to say, you know, focus more on that underlying engine, the business itself, and how it’s compounding, and not worry so much about where you are and the age of the company. You don’t have to get in at the IPO.

[00:08:18] Robert Leonard: You mentioned how the company needs a long runway for growth, and that’s typically easier with a smaller company.

[00:08:24] Robert Leonard: So, what can you tell us about the market cap of these companies?

[00:08:28] Chris Mayer: Yeah, so I mean, the average starting market cap, if I remember correctly, was less than 500 million. And the companies were fairly substantial businesses already, I think around 170 million or so in sales. So it’s not like they’re tiny, but they’re certainly not 30 or 40 billion market caps either.

[00:08:49] Chris Mayer: I think my opinion has changed a little since I wrote the book because initially, I think I told people to focus on market caps, maybe around 300 million or 500 million. Pretty small. But I think you can relax that a little bit. I don’t think you should hesitate if you find a really good business that meets all these other criteria we’re talking about, but it has a $2 billion market cap or a $6 billion market cap.

[00:09:21] Chris Mayer: I don’t think you should avoid it or pass on it because it’s really hard to predict which company will get to a hundred times. I wouldn’t try to imagine necessarily that it will go up a hundred times. I would focus on, again, those characteristics that say, “Does it have a really good business? Can it defend itself? Does it seem like it can compound for a decade or more?” And then you kind of follow the story and see how it goes.

[00:09:55] Chris Mayer: And the thing about it is, and I talk about this in the book, if you aim big, if you aim for that hundred times and you don’t get it, you’re probably still going to have a pretty good result. I mean, if you get 50 times or 25 times your money, I think everybody will be very happy with that.

[00:10:19] Robert Leonard: I think one of the hardest parts of buying hundred baggers is the mentality or the psychological piece of it. I mean, of course, finding these companies, finding these opportunities is very, very difficult, and that’s step one.

[00:10:34] Robert Leonard: Once you’ve done that, the hard part is really being able to weather the storm. I mean, you look at Amazon, and it looks like it was a given. If you look back now, hindsight’s 20/20, it seems like everybody should have been involved. But if you zoom in, there have been periods of time where these companies have lost a lot of money.

[00:11:00] Robert Leonard: You know, companies have lost more than 50% of their value at some points, and some companies even multiple times. You really have to have the kind of wherewithal or the gut to stomach these types of things. Talk to us a bit about the mindset that you need and what type of investor you need to be to hold these stocks and get these hundred x returns.

[00:11:27] Chris Mayer: Yeah, you have to be very patient, and you have to be able to take the ups and downs, not only the ups and downs, but also the long stretches where the stocks went nowhere. I usually mention Berkshire Hathaway as the best-performing stock in that study, and even that stock had at least three different times when it was cut in half, and it was just as challenging.

[00:11:55] Chris Mayer: There was a seven-year stretch where it went nowhere. So think about that. Some of these stocks require you to hold onto them for years, and during that time, they went nowhere, right in the midst of going up a hundred times. The market will test your patience. That’s why I believe it’s important for investors who want to invest this way to have a different scorecard other than just looking at the market price all the time and judging the investment based on the market price.

[00:12:29] Chris Mayer: Instead, they should focus on the business itself. Is the business growing? Is it continuing to perform? I remember a table from Phelps’s book that stuck with me, and I included similar tables in my book. He used the example of Pfizer and showed some basic financial data over a 20-year period, asking if you would have ever sold the business just by looking at those figures.

[00:12:56] Chris Mayer: Of course, you wouldn’t have, because every year it was performing well. But if you look at the stock chart during that time, it was up, down, and had long stretches where it went nowhere. This is a big part of it. I would say it’s just as challenging as finding the great businesses to begin with, as it requires the ability to hold onto them.

[00:13:23] Robert Leonard: I know you just mentioned some of the things on your checklist now, but what are you looking for in terms of qualitative and quantitative metrics? Could you please break down your checklist for finding great businesses a bit more?

[00:13:39] Chris Mayer: Quantitative metrics would be: I always, I mean, I just say return on capital because I know that’s kind of vague, but I mean, it’s ’cause I look at a lot of different things. I mean, I look at return on equity, return on invested capital, or return on capital employed, and these are all just standard definitions. You can Google and see, you know, how they’re calculated. A lot of financial websites these days even calculate them for you. But we know that getting the hundred-bagger level is basically a math problem at the end of the day if you compound 25% a year, you’re going to get there in 20 years, and you’re not going to hit that every year. Of course, there’ll be some years down, some years up, but you want a business that can compound capital at that Penn rate. So once you find businesses that are like that, that have those good returns, then you really have to kind of dig in and figure out why they earn those returns.

[00:14:49] Chris Mayer: Because we know the nature of capitalism is that there’s going to be competition. If you’re over there making all kinds of money, it’s not like you’re just going to keep doing it and no one’s going to pay any attention. People are going to be like, “Wow, she’s making all kinds of money in her business. Maybe I should do something similar.” And that’s what kind of brings down those returns on capital—having a lot of competition. So I spend a lot of time, and I would recommend, this is where investors should put most of their time, figuring out what makes that business special. Why are they able to earn those kinds of returns? What kind of competitive advantage do they have over their competition, and how are they going to be able to protect that return over a long period of time?

[00:15:47] Chris Mayer: Those are essentials right there. You start with that.

[00:15:51] Robert Leonard: Maybe it’s just my perception, but it does seem like these days it’s getting harder for companies to keep their competitive advantage for 10 or 20 years. Whereas, you know, maybe a couple of decades ago, it was easier to maintain a competitive advantage and reach that hundred-bagger status because you need to usually hold it for 10 years, generally, like you’ve said.

[00:16:16] Robert Leonard: So, you know, this competitive advantage piece and the time in which a company is able to hold their competitive advantage is interesting—something to think about. So how do you reconcile these two kind of ideas in the companies that you look at?

[00:16:33] Chris Mayer: Yeah, I think that’s objectively true, what you’re saying. I mean, we see it in the corporate lifespans of businesses that are coming down; they’re briefer. So it’s definitely tougher nowadays. And yeah, I mean, I think that’s true and something you have to be aware of. And sometimes, you know, I think about sometimes like… we wrote the book, I might have to have a chapter on what sort of unmake these hundred baggers.

[00:17:03] Chris Mayer: But certainly, I think you have to be aware of technological change and obsolescence. So some businesses are more subject to that. You know, one of the things I pay a lot of attention to is just the structure of the industry—like how many competitors. Sometimes you’re going to be a small player and there’s just a sea of competition, versus some industries are structured where there might only be one or two major players.

[00:17:33] Chris Mayer: So, you know, for example, there’s a company called Copart, and in that industry, it’s Copart and insurance auto auctions. They’re kind of a duopoly. And so that kind of situation, just on the face of it, is more appealing than buying a company that has maybe 2% of the market and there are, you know, 50 competitors out there.

[00:17:57] Chris Mayer: So sometimes that can give you a clue as well. What I would say, you know, you have to really focus on competition, where it’s likely to come from, and then dig into those competitive advantages because some competitive advantages are better than others. You know, if your sole competitive advantage is you have a brand that you’re able to charge more for, that’s usually a good competitive advantage. But if you think out 10 years or longer, you know, it might not be the best because we’ve seen brands that kind of lose their luster. Right. We could probably come up with some examples. But if you have something that’s more difficult to break, like imagine, you know, trying to break a network effect like say Google, you know how difficult it would be to get—first, you gotta get people to use your search engine, and that would be, you know, an example of a very strong competitive advantage. I think.

[00:19:02] Chris Mayer: So there is a lot of qualitative stuff as well, which is hard to give you a definite checklist where you can say, well, this is, you know, this is what you want to see. It’s an analysis you have to do and think about and compare that competitive advantage, how strong it is compared to what the competition is doing.

[00:19:26] Robert Leonard: How often do you reassess the competitive advantages of the companies that you’re invested in? Is it every time you’re keeping up with the company? Is it yearly? What seems like a red flag that makes you potentially want to sell the stock if you think their competitive advantages are gone?

[00:19:47] Chris Mayer: Yes, and this is getting to a very difficult subject of investing: when to sell. It’s probably the hardest decision of all. So, you know, the one thing is when your thesis changes, people say, and that’s a good longstanding investment wisdom there. But what does it mean when your thesis changes? You know, what do you really see?

[00:20:10] Chris Mayer: So I think it’s a great question and I think, you know, there are no easy answers, but when you buy a stock, what I do is I write down a… I have internal memos and things where I write down why I bought it and be very clear and specific. And when those things start to change for the worse, that’s when you really have to reassess what you’re doing. And it might be time to leave.

[00:20:41] Chris Mayer: You know, I look at every quarterly release that comes out, but I think that not much really changes in a quarter. So I’d be reluctant to make any kind of change just because somebody had a bad quarter or, yeah, so, you know, I’d say like once a year, a good assessment. And then it’s not only that, but you know, sometimes there’s news that comes out. If a new competitor has come into play here that you didn’t factor in or didn’t see, and your company starts to lose market share, that would be a big warning flag. It might be time to go. So it’s really an ongoing assessment. It never really ends, but at least I would say for most people, you would want to check in at least annually. Give it a good look.

[00:21:37] Robert Leonard: We’ve talked a bit about business quality and your checklist for quality, but how do you think about valuation in your investment process? At what point would you maybe rule out a company that hits your checklist or satisfies your checklist for being a great quality company, but you just don’t like the valuation? You just don’t like the price?

[00:22:01] Chris Mayer: Yeah, well first, you did the interview in the right order because it’s definitely spent a lot more time on the business itself. And then, you know, that’s the harder piece to fill out. And once you have that business, then you have to think about valuation and the price you’re going to pay. And maybe you don’t like the price now, you can wait. You may buy a little bit now and then leave yourself lots of room to buy more as you go along.

[00:22:35] Chris Mayer: But the way I think about valuation is really kind of simple. So I have an estimate of what I think that business can earn, what kind of return on capital, and you project out over five and 10 years, usually. And then put some sort of multiple on that that you think is reasonable. And then what’s your IRR to present?

[00:23:00] Chris Mayer: So, it’s hard to get what I call in the book the twin engines, where, as you mentioned, you get multiple expansion along the way. That is like Nirvana. If you can find that, if you can find a company, that great business that checks all the things we talked about and it’s out there for 10 times earnings, and you own it, and at the end of, you know, 10 years, it is trading at 40, that really helps a lot.

[00:23:33] Chris Mayer: Those are very hard to find though. You might get chances along the way where that happens, but they are hard to find. So that’s really how I think about valuation. And then I have a certain hurdle that I want and a lot of times, because I’m working with what I think are reasonable or maybe, you know, assumptions, I’m looking for at least a 15% compound annual return, but you can dial that up and down depending on what kind of assumptions you make.

[00:24:07] Chris Mayer: If you make different assumptions, you may have a different hurdle rate. So it’s more of a personal thing there as to what you’re going to make your hurdle rate be. But you have to think about valuation in that kind of context.

[00:24:25] Robert Leonard: This brings me back to your case study of Amazon, and personally, I think of companies that I’ve found, even after reading your book, where they meet everything on my checklist. They’ve been compounding at a good rate for a decade or more. They have high returns on invested capital, they have great management, all of those things. But their price-to-earnings (PE) ratio is 80 or even higher. So, if I think it’s reasonable for this to be at least 30 at maturity, that’s still a massive multiple contraction. And so, I just can’t justify it today. Then you watch it keep going up over the years, and so I’m not sure how to approach that.

[00:25:11] Chris Mayer: Sure, sure. I’ve had stories like that too, where you know, it’s a great business and it just always seems to trade at really difficult prices. So I think you’re not going to be able to hit all of them. Some of them, you’re just going to, you’re going to be frustrated and be like, gosh, you know, I could have bought that five years ago and it was trading very expensively. It’s still very expensive. So yeah, everyone has their own wheelhouse too, about what they feel comfortable with. I would agree with you that probably 80 times is pretty far out there because you have to make some really optimistic assumptions for something like that to pay out.

[00:25:59] Chris Mayer: Now, of course, plenty of companies have, and you may have heard of Terry Smith, and he has done this analysis where he looks at, you know, he goes back and says, or looks at how much you could have paid for some of these big winners. And it’s always like astounding multiples, right? You could have bought, you know, L’Oreal for 150 times earnings or something and still made 10% annualized because it did so well. And I’ve done that with some of my holdings too. You just roll it back 10 years and say, well, what price-earnings ratio could you have paid and still made 15% a year? And it’s always surprising, you know, it’s always a surprisingly high number.

[00:26:48] Chris Mayer: So this is just, as investors, we just, it’s difficult. We have to balance out this view of, you know, you want to try to be realistic about what a great business can achieve and at the same time, you don’t want to overpay because it’s painful. As you mentioned, if you pay something 80 times earnings and then it goes to 30 over the next two years, that’s a painful and harsh headwind to overcome.

[00:27:18] Robert Leonard: So, have you seen the companies you study revert to an industry average multiple over time? Can we estimate that as the potential contraction, or is that not the right way to think about it?

[00:27:32] Chris Mayer: No, I don’t think so. Well, I mean, I think these big winners that we’re talking about often are able to resist those mean reversion trends for a very, very long period of time. So I would say it’s pretty common for hundred baggers in the study to trade at large premiums to the market.

[00:27:54] Chris Mayer: It’s not like they were a secret. So yeah, I think you’ll wind up paying a premium sometimes, and it’s okay because it will always, as you say, hold its multiple for quite a long time and it’ll grow into it, and you’ll still do very well. So there are no hard and fast rules here.

[00:28:17] Chris Mayer: I think it’s kind of a case by case, but in general, I would definitely feel safe with the conclusion that many of these stocks traded expensively for good chunks of their history.

[00:28:30] Robert Leonard: How do you think about unprofitable companies? Or do those just not even make it to your list? Because a lot of small companies these days, it seems, aren’t profitable, and you kind of have to make a bet on their future growth and profitability.

[00:28:48] Robert Leonard: So how do you think about these unprofitable companies?

[00:28:51] Chris Mayer: Yeah, I mean, this is where I think, again, it’s maybe more of a personal preference, what you can do here, but for me, I think it’s a basic filter. They have to be making money, have to be profitable, and I have to see the good returns now or not some sort of a money loser now that maybe five years from now will turn the corner.

[00:29:19] Chris Mayer: I think it’s just less risky to focus on companies that are profitable. But as you mentioned, there are certainly lots of companies that were unprofitable at first, and if you were correct, you really got paid pretty well.

[00:29:34] Robert Leonard: Are there any adjustments that you make to maybe compare apples to apples better with unprofitable companies versus profitable companies, or even technology companies or healthcare or anything like that?

[00:29:46] Robert Leonard: You know, some analysts will adjust for R&D. So, are there any adjustments you make like that?

[00:29:53] Chris Mayer: Sure. Yeah, you have to be careful about that, right? Because otherwise, you wind up kind of talking yourself into something that’s not true. But certainly, the accounting realities don’t always reflect the economic realities.

[00:30:07] Chris Mayer: And, you know, I focus on cash flow and free cash flow. But some companies have CapEx, and if you were to ding them for that, then they trade at very high multiples of free cash flow. But if you were to look at the CapEx as something they actually get a return on and that propels the business forward, it’s part of what makes it grow then.

[00:30:34] Chris Mayer: Yeah, it’s not such a negative. So I have a few companies in the portfolio where I like it when they have a lot of CapEx because their return on that capital is very high. I want them to invest, and in that case, I’m trying to look at the valuation of the cash underlying the free cash flow generating power of the business.

[00:31:00] Chris Mayer: I do back out those growth CapEx. I think that’s, you definitely have to do that, and it can be a similar argument with R&D, certain kinds of R&D, so you really have to know your company well and see what makes sense.

[00:31:17] Robert Leonard: I like the example you had in the book where you were quoting someone else, I believe. But they said that if a company isn’t reinvesting their money, you can expect that high return on equity or a high return on invested capital to decrease because otherwise, they’re just putting their money in T-bills that’s not earning a lot. So you would then expect it to decline over time.

[00:31:45] Robert Leonard: Does that suggest it’s a warning sign when a company isn’t reinvesting most of their cash back into their business?

[00:31:53] Chris Mayer: Yeah, absolutely. I think so. I mean, this is something I definitely pay attention to. I look at the reinvestment rate, and I remember Thomas Phelps’ one of the more controversial things he said in his first book, which is when he said dividends can be an expensive luxury.

[00:32:12] Chris Mayer: So companies, when they have the cash, they can pay it out in the form of dividends, where, like you said, they could just kind of sit on it. Ideally, you know, we’re looking for these companies that are going to be big winners, hundred baggers. We want companies that have high returns, and then we want them to reinvest as much as possible because that really is what propels the growth going forward.

[00:32:42] Chris Mayer: And every once in a while, you’ll find the rare business that can maintain a high return on equity without having any need to reinvest. You know, they just, businesses spit off cash and have no need for it. And then in those cases, you’ll have to make some exceptions, but most businesses require some reinvestment to grow, and we want to see them deploy that capital, especially if they’re earning 30%, 25% return on their equity.

[00:33:13] Robert Leonard: Talk to us a bit more about what reinvestment rate you look at, or maybe how it differs for different investments, different industries, different companies, and what your outlook is for these companies.

[00:33:26] Chris Mayer: Yeah, I mean, you know, it’s kind of a think of it almost as like a basic math problem. So if you have a company that’s earning a 20% return on equity but then pays out half of it in dividends and only reinvests half, you know, you’re kind of compounding at half the ROE because it’s paid out most of that capital. Versus someone who’s earning 20% but reinvesting the whole thing, then you’re getting 20%, 20%, 20%, assuming that they can get that 20% return on the money they reinvest, which those are the businesses we want to find.

[00:34:06] Chris Mayer: And sometimes it’s actually even increasing over time as they get bigger, as they benefit from economies of scale. That return on incremental capital they’re reinvesting can actually be higher, so you see ROE start to trend up over time. Those are really nice situations. If you can find a business that’s at 15% on its way to being 25% over a decade, that will probably be a wonderful investment.

[00:34:34] Robert Leonard: And then you’re also factoring in and always considering their leverage when you’re looking at return on equity and just making sure that it’s not boosting that.

[00:34:42] Robert Leonard: And that’s kind of why you were looking at return on capital and other metrics as well.

[00:34:47] Chris Mayer: Yes, yes. That’s why I hesitate to kind of point to a specific metric because then people will be looking at ROEs, not recognizing that a big drawback of ROE is that you can juice it up with leverage, as you mentioned. And sometimes it doesn’t work if a company is doing a lot of buybacks. You know, that can mess up the equity piece of the equation.

[00:35:14] Chris Mayer: So you do have to look at a spread of different return metrics for sure.

[00:35:20] Robert Leonard: How do hundred baggers today even get on your radar? How are you searching for these stocks, and what does that look like at the very beginning, early steps of your process?

[00:35:33] Chris Mayer: What does it look like? Yeah. It’s a combination of things. I mean, some of it’s screening for businesses with high returns. I’ve definitely found businesses that way, and I’m looking all over the world, mostly Western Europe, North America, as a practical matter. And then just a lot of reading, talking to people, other investors. So I’m really agnostic where the ideas come from. They can come from almost anywhere, sometimes just accidental. You know, you’re researching one company and you find out about another company that could be a competitor or supplier, and then you find out you like that company better. So for me, it’s not really been the super systematic approach.

[00:36:19] Robert Leonard: I was watching some YouTube videos in preparation for this interview, and I was also watching some other interviews you’ve done, and some of them might be a bit older now, but you liked Constellation Software and some of the spinoff talk that was around that.

[00:36:37] Robert Leonard: Are those the types of companies that you like, or do you have any thoughts on Constellation Software these days?

[00:36:45] Chris Mayer: Yes, I mean, I certainly do like Constellation Software and Topics. I have both of them now. Constellation is very large, but both really hit a lot of the things we’re talking about. You’ve got really nice incentives in place, high returns on capital. It reinvests a lot, and it shows in their results. You know, Constellation spun off from Volaris, so hopefully Tous will follow the path of its parent. But I like both of those. Also, you know, competitively they’re in a good position. Vertical market software is tough to rip out, tough to compete with. So yeah, that definitely checks a lot of the boxes we’re talking about here.

[00:37:30] Robert Leonard: Yeah, and that company is like Constellation Software of Europe, essentially. And you know, some people are saying it’s maybe where Constellation was 10 years ago. So would you say maybe it’s an opportunity to get something like Constellation but earlier?

[00:37:44] Chris Mayer: I think so. I mean, it’s not really a secret there. So Tous is much more expensive than Constellation was 10 years ago. But yeah, I think that’s kind of the analogy people are drawing, that Tous will, over time as it consolidates the European market, track something similar to what Constellation Software itself has done. In which case, it would be a very, very nice investment. I really like it. And yeah, that’s one I plan to hold for a long, long time.

[00:38:18] Robert Leonard: What’s an example of a company that didn’t work out for you so that we can all learn from your experience?

[00:38:25] Chris Mayer: Yeah, I mean, there are a lot of companies that didn’t work out for me. Well, the last company that I sold was actually one that I made a good profit on, but it might still be instructive to talk about. It was a company called Texas Pacific, which had wonderful economics and super high returns on capital. It was basically a royalty company on oil. This was one of those rare companies that could grow without any additional capital. However, unfortunately, it was in the clutches of a management team that may not have been as shareholder-friendly as I would have liked to see.

[00:39:07] Chris Mayer: If you Google it, you’ll see that there were activist shareholders involved and there have been a lot of acrimonious letters going back and forth. So, I finally decided to let it go because of these reasons and the slipping corporate governance. That’s an example. When you see management teams start to go against what you believe in terms of treating shareholders fairly, it’s a definite warning sign. And I think you’ll find that in investing wisdom from Buffett and other people who talk about the importance of being with management teams and people you trust. 

[00:39:45] Robert Leonard: You tend to stay away from companies that are more like price takers and things like commodities.

[00:39:52] Chris Mayer: I would say yes, definitely. Texas Pacific was more of an exception. But yeah, I generally don’t look at commodities or any of those kinds of industries. I prefer companies that have the ability to raise prices if needed.

[00:40:07] Robert Leonard: What other things would be warning signs for management? I know you talked about how founders and founder-led companies are typically a positive sign, but let’s say, for example, Mark Leonard at Constellation. If he left, would the company still be as great without him? Or how do you think about situations like that?

[00:40:29] Chris Mayer: Yeah, well, in the case of Constellation Software, I think they have a very deep bench. So I wouldn’t, I mean, certainly, a losing Mark Leonard would be a big loss, but I think that what he’s built there and the culture and the management team he’s got, they would carry on pretty well.

[00:40:51] Chris Mayer: But yeah, this is a double-edged sword. And I remember Phelps used to talk about if you have too much reliance on one person, you’re heartbeat away from a problem. I always remember that expression. So there’s a dual-edged sword there with entrepreneurs. I mean, you definitely would love to be invested alongside a founder, but then you do take on the risk that if something happens to that founder, what happens to the business?

[00:41:21] Chris Mayer: And hopefully, the business is strong enough where they can continue without the founder, as many great businesses have. There are other pitfalls, though, with management teams that you can look for. I mean, I like businesses where the management owns some decent percentage of stock, so there’s a lot of skin in the game there.

[00:41:43] Chris Mayer: But even then, you can still have situations where there’s abuse. So, I mean, one obvious hurdle is if you find that the compensation of the executives is egregious, you know, even bystanders of their peers in the industry. If you think the incentives are not particularly fair or aligned. So, you know, I hate it when I see bonuses paid on sales growth or, you know, EBITDA increases.

[00:42:11] Chris Mayer: So those can be some red flags as well. And if you really dig deep, I mean, I spend time thinking about the culture of the business. So, you know, are the employees generally happy being there, and sometimes companies will report their turnover rate in their 10K or in their annual filing.

[00:42:32] Chris Mayer: Or they’ll say something about their employees. Maybe their employees own a decent percent of stock as well because they promote an ownership culture. You know, those would be good signs.

[00:42:44] Robert Leonard: What pitfalls do you think are common for investors to fall into when they’re trying to search for hundred-bagger opportunities like this or just any stock investment with great returns?

[00:42:56] Chris Mayer: Well, you know, I think partly they can get overly scared by the higher multiples that we paid, that we talked about earlier. If you find a really high-quality business, yeah, you may pay what may seem like a somewhat uncomfortable multiple. And in the beginning, so sometimes people get a little obsessed about that.

[00:43:18] Chris Mayer: I think sometimes people can fall into the trap of just looking for growth, as we talked about before, and not for me, again, I focus on profitable companies. But if you’re not going to do that, there are a lot more risks. You know, the companies that show IPO and growth numbers that seem like they’re going to grow for a long time, but their underlying business isn’t really that good.

[00:43:47] Chris Mayer: And so that can be a pitfall as well. But most of the pitfalls, I think, people run into is they’re just too short-term oriented in general. So they worry too much about whether there’s going to be a recession or whether the market’s going to crash or what the next quarter or two is going to look like, and then they get tripped up that way.

[00:44:14] Robert Leonard: What advice do you have for an investor right now who might be looking at some of the macro stuff that’s going on and feeling a little doom and gloom?

[00:44:22] Chris Mayer: Yeah, I mean, I would say, you know, remember that these things have always happened. Really look back any year, there’s always some big concern and big worry, really.

[00:44:33] Chris Mayer: I mean, it’s rare that you have a year where there’s not some big macro drama somewhere. And yet, these companies have continued to perform. I mean, look at the long-term records of some of the big winners. They had to suffer through all the recessions and the drama that happened during those stretches.

[00:44:55] Chris Mayer: So, like I said earlier, I think it’s important to develop some kind of other scorecard other than simply stock prices. And so really focus on those businesses, and as long as those businesses are performing well, there’s not much else you can do. You let time be your friend on those kinds of investments.

[00:45:17] Robert Leonard: How do you think about doubling down? Let’s say you see a company you really believe in that drops 30, 40, 50% in this market, but the fundamentals just haven’t changed. Your investment philosophy or thesis hasn’t changed in your view. Is that an opportunity for you to buy more and double down?

[00:45:38] Chris Mayer: Yeah, that’s my first instinct. If I have cash, it would be to buy more of that company. I also have portfolio considerations to keep in mind. I don’t want to allocate too much into a single name, so my own limit is 10% when adding to it. If it appreciates more than that, that’s okay. It’s a good problem to have. But I don’t want to exceed 10% of my portfolio in one name because there’s always a chance of making a mistake. I don’t want to invest half of my portfolio in one name and then realize I made a mistake, resulting in significant losses. So there are portfolio considerations to take into account. Currently, I have only 10 names in my portfolio.

[00:46:28] Robert Leonard: Now, how do you handle runners in your stock portfolio? Let’s say a company has just run up a tremendous amount. Now it’s maybe 20% of your portfolio. What do you do in that situation?

[00:46:41] Chris Mayer: I love those. Those are great. And so that’s why I say if it’s you know, I’m, I don’t want to put more than 10% of my capital in any particular name, but if it appreciates and gets to 20 or 25, those are good. That’s a good problem to have.

[00:47:01] Chris Mayer: And in fact, if you look back at a lot of the great track records in investing, it’s because they allowed a big winner to just run. So again, this is kind of a little bit of personal preference too because different people are in different situations, but for me, I’m very, very reluctant to trim anything.

[00:47:24] Chris Mayer: So I prefer to just let the portfolio become unruly over time, and hopefully, there will be a couple of big winners that will carry most of the load. That’s the nature of the beast.

[00:47:38] Robert Leonard: I think that’s one of the hardest parts for me. When you see it go up substantially, you usually see valuations get extended and, you know, sometimes it’s hard to not take a bit of profit. But I also don’t want to sell one of my best winners. So it’s hard, and especially if I don’t need the cash or I don’t have a great opportunity for it, it can be hard to know what you should really do with that money.

[00:48:11] Chris Mayer: Yeah, I think so. And then you have to think about, I mean, we’re assuming the businesses we’re talking about are good quality businesses. There are lots of speculative things where, yeah, you should take off the table or sell. Or maybe you shouldn’t have bought in the first place and you were lucky. But think about all the things you have to get right.

[00:48:37] Chris Mayer: If your modus operandi is to trim things, you’re paying taxes on the gains. Then you have to figure out what you’re going to do with that money, and what you do with it might be worse. You might have been better off just leaving it with what you had. So I try to think of it once I own a position, try to keep the number of decisions down as little as possible. It seems to do better.

[00:49:08] Chris Mayer: Plus, the less I touch it, the better it does.

[00:49:12] Robert Leonard: In your book, it was fairly common to see that a lot of the hundred-baggers weren’t really confined to one sector. They were kind of all over the map. How do you think about sector allocation? Or do you not even consider that? It’s just whatever great businesses you find.

[00:49:32] Chris Mayer: Yeah, that’s a great point to bring up because that’s true. I mean, I had the impression that maybe when I started, there would be a lot of tech names that would dominate the list, but that wasn’t the case at all. They were all from different kinds of industries. So I don’t consider industry affiliation, other than from a circle of competence point of view. For example, I haven’t generally been a good retail investor. Retailers are kind of tough for me, so I just avoid that sector. I don’t really invest much in pharma either. Those are sectors I don’t know much about and don’t feel comfortable with.

[00:50:16] Chris Mayer: There are certain industries that I think are inherently off-limits. For example, banks, ironically, is one of those things I don’t look at. In a concentrated portfolio like the one I’m running with 10 to 12 names, I can’t take the kind of existential risk that comes with banks due to their inherent leverage and funding risks on their balance sheets. I’m also reluctant to get involved in insurance for the same reason. You could have a very good insurer running, and then suddenly you find out they’re taking all these hard-to-figure-out risks and surprise you with losses. So there are certain industries like that. Additionally, commodities would be another sector I wouldn’t look at.

[00:51:02] Chris Mayer: Other than those kinds of things, I’m willing to look at almost any kind of great business.

[00:51:09] Robert Leonard: How has your investing process, both for trying to find hundred-baggers and your general investment process, changed over time? How was it when you first got started, versus how it is today?

[00:51:22] Chris Mayer: Yeah, it’s changed a lot. It’s changed a lot. I remember when I was first learning in my twenties, I was much more of a Graham and Dodd-style value investor, looking to buy things below book value and at low multiples of earnings, and those sorts of things. It was a slow process, gradually pushing me towards the quality spectrum, and I think that’s probably a pretty common migration for a lot of investors. Even Buffett himself went through a similar migration. You start out doing a lot of different things, special situations, and you dabble somewhat in turnarounds.

[00:52:02] Chris Mayer: So I’ve kind of done everything, but more and more I’ve pushed towards this style. Writing the book “100- Baggers” had a lot to do with that as well. It was kind of a spark that accelerated the process. Now I’m a hundred percent focused on the style of investing that I write about in the book, and I enjoy it. You have to pick an investing style that suits your temperament because the market will test you, and if they’re not a good match, you might switch at the worst possible time. So you have to kind of enjoy it.

[00:52:42] Chris Mayer: I like this approach because it allows me to really dive into studying companies and get to know them well. I enjoy seeing them grow over time and following their story.

[00:52:54] Robert Leonard: I will make sure to put a link to your book in the show notes, but where else can the listeners go to learn more about you and everything that you do?

[00:53:02] Chris Mayer: Yeah, I’m on Twitter, so my Twitter handle is @ChrisWMayer. If you Google “Woodlock House Family Capital,” you’ll find my website where I occasionally write a blog. You can check that out too.

[00:53:15] Robert Leonard: Perfect. Thank you so much, Chris. Thanks for joining me on the show today. 

[00:53:19] Chris Mayer: Thank you. Great questions.

[00:53:21] Robert Leonard: All right, guys. That’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week.

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