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My recommendation: 8/10

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Summary of notes and ideas

“What investors should do is focus on the business, not on market prices. Phelps showed me financial histories of a long list of companiesearnings per share, returns on equity and the like. No stock prices. After one example, he asked, “Would a businessman seeing only those figures have been jumping in and out of the stock? I doubt it.” But if they just sat on it, they’d be rich”

“Phelps also stands against market timing. He told me about how he predicted various bear markets in his career. “Yet I would have been much better off if instead of correctly forecasting a bear market, I had focused my attention through the decline on finding stocks that would turn $10,000 into a million dollars”

“In the stock market, the evidence suggests, one who buys right must stand still in order to run fast.” It is superb advice”

“So my discovery in investing, and advice to younger ones who would endeavor to, (sic) is to study markets and invest in long term enterprises which have the potential to vastly outpace other companies and industries and stick with them as long as the theme is intact. Forget about the trading and use the time you would have spent monitoring the trade with your family”

“That is an inspiring tale, a triumph of lethargy and sloth. It shows clearly how the coffee-can portfolio is designed to protect you against yourself—the obsession with checking stock prices, the frenetic buying and selling, the hand-wringing over the economy and bad news. It forces you to extend your time horizon. You don’t put anything in your coffee can you don’t think is a good 10-year bet”

“Phelps showed that if you just looked at the annual financial figures for Pfizer—ignoring the news, the stock market, economic forecasts and all the rest—you would never have sold the stock. It was profitable throughout, generating good returns on equity, with earnings climbing fitfully but ever higher”

“The problem isn’t only that we’re impatient. It’s that the ride is not often easy. This reminds me of a story from 2012 by fund manager Dan Oliver at Myrmikan Capital. He pointed out that Apple from its IPO in 1980 through 2012 was a 225-bagger. But … Those who held on had to suffer through a peak-to-trough loss of 80 percent—twice! The big move from 2008 came after a 60 percent drawdown. And there were several 40 percent drops. Many big winners suffered similar awful losses along the way”

“The essence of the coffee-can idea is really that it’s a way to protect you against yourself—from the emotions and volatility that make you buy or sell at the wrong times. Bullishness or bearishness doesn’t enter into it.”

“In this case, the story begins with Stanley Ma, who became president of the company in 2003. MTY had a fast-food franchising business. And Ma “was the entrepreneur who started the company’s very first restaurant concept Tiki Ming—Chinese Cuisine in 1987 as a recent immigrant to Canada.” What’s most remarkable about this is Ma bought 20 percent of the company when he became president. Altogether, he owned 29 percent of the firm. As an owner-operator, he had every incentive to make the stock work”

“I call these two factors—growth in earnings and a higher multiple on those earnings—the “twin engines” of 100-baggers”

“• S—Size is small. • Q—Quality is high for both business and management. • G—Growth in earnings is high. • L—Longevity in both Q and G • P—Price is favorable for good returns”

“To make money in stocks you must have “the vision to see them, the courage to buy them and the patience to hold them.” According to Phelps, “patience is the rarest of the three”

“There is no magic formula to find long-term multibaggers. • A low entry price relative to the company’s long-term profit potential is critical. • Small is beautiful: 68 percent of multibaggers in the selected sample were trading below a $300 million market cap at their low. (They were microcaps.) • Great stocks often offer extensive periods during which to buy them. • Patience is critical”

“So, it may seem that the price paid did not matter. Certainly, few would complain about a 10-bagger. But the truly big return comes when you have both earnings growth and a rising multiple. Ideally, you’d have both working for you. My thought experiment might be extreme, but it serves to make the point that you can’t just willy-nilly buy pricey growth stocks and expect to come up with 100-baggers.”

“The 100-bagger population seems to favor no particular industry. There are retailers, beverage makers, food processors, tech firms and many other kinds. The only thing they seem to have in common is the subject of the study: they returned at least 100 to 1.”

“At heart, he understands two things,” Thompson writes. “He understands the value of a business is the sum of its future free cash flows, discounted back to the present. And he understands capital allocation and the importance of return on invested capital”

“Having said that, you ought to prefer to pay a healthy price for a fast-growing, high-return business (such as Monster) than a cheap price for a mediocre business. A little math shows why. Peter Lynch ran through an example in his book One Up on Wall Street: All else being equal, a 20 percent grower selling at 20 times earnings (a p/e of 20) is a much better buy than a 10 percent grower selling at 10 times earnings (a p/e of 10). This may sound like an esoteric point, but it’s important to understand what happens to the earnings of the faster growers that propel the stock price.”

“You can see what a radically different place you end up at with the fast grower after 5, 7 and 10 years. If both stocks retain their P/E, company A will end up at $123.80 and will hand you a 5-bagger. Company B will sell for $25.90 and give you a double. Even if the 20-P/E stock fell to 10 P/E, you’d wind up with a lot more money still—a triple”

“Jason starts his process by screening the market, looking for high-ROE stocks. “If a company has a high ROE for four or five years in a row—and earned it not with leverage but from high profit margins—that’s a great place to start,” he said. But ROE alone does not suffice. Jason looks for another key element that mixes well for creating multibaggers. “The second piece requires some feel and judgment. It is the capital allocation skills of the management team”

“I asked about stock buybacks, which boost ROE. He’s agnostic, generally. But he’s leery of buybacks and no sales growth. “If you have a company with tons of cash flow but top-line (sales) growth is 5% or less, the stock doesn’t go anywhere,” he said. “IBM is a good example. Good ROE. Cheap. But the absence of top-line growth means the decline in share count has been offset by multiple contraction.” As a result, the stock goes nowhere. Jason is reluctant to buy a high-ROE company where the top line isn’t at least 10 percent. But when he finds a good one, he bets big.”

“The people who make these ETFs like to put big, liquid stocks in them. These are easy to buy and sell. The problem is that companies controlled by insiders—thanks to their large stakes—tend not be as liquid as their peers. Thus, the ETFs bypass such companies or give them a low weighting. As result, Doyle said, “We’re finding these owner-operators … are being priced well below the marketplace, yet … they have returns on capital far in excess of the S&P 500 index or any other index you might be looking at”

“• capital allocation is the CEO’s most important job; • value per share is what counts, not overall size or growth; • cash flow, not earnings, determines value; • decentralized organizations release entrepreneurial energies; • independent thinking is essential to long-term success; • sometimes the best opportunity is holding your own stock; and • patience is a virtue with acquisitions, as is occasional boldness”

“I favor the half-Kelly because it cuts the volatility drastically without sacrificing much return. Poundstone says a 10 percent return using full Kellys turns into 7.5 percent with half-Kellys. But note this: “The full-Kelly bettor stands a one-third chance of halving her bankroll before she doubles it. The half-Kelly better (sic) has only a one-ninth chance of losing half her money before doubling”

“Second, partner up with people who have had success. If you stick with people with a track record of success, it is unlikely you will step into a fraud like Sino-Forest. Third, stay away from weird things—you know, companies that do things you can’t understand. If you don’t understand how they make money—see Sino-Forest—run”

“Investing is a people business. Early on, I relied on reported numbers and I screened for statistical cheapness. I’d look for low P/E stocks, for example. Everyone can see these numbers. Yet, these methods can still work well. Over time, however, I’ve learned that knowing what the numbers don’t show is worth more than any statistic”

“In essence, hunting for 100-baggers is completely independent of whatever is happening in the market. You should never stop looking for 100-baggers, bear market or bull”

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There are a ton more notes but I’ll leave it at this right here. Please pick up a copy and enjoy.

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