Notes and short summary of the book “100 Baggers: Stocks That Return 100-to-1 and How To Find Them” By Christopher W Mayer

Link to the book on Amazon:

This book is presenting for us what is the typical characteristic of a 100-bagger stock, by looking back at the history of the stocks that has already become 100 baggers. It identifies how they looked like in the beginning and what they had in common before they began their growth to become 100-baggers. The author tells us that there are no clear method or formula for identifying 100-bagger stocks, but there are some things they have in common that you can use in your search for these types of stocks.

The book is easy to read and quite useful, especially for the beginner investor.

Here are my notes in no particular order:

-Typical characteristics of 100 bagger stocks: Keywords: New methods, new materials, new products, good for mankind.

-Focus on quality and not price. Compounding is what counts the most, not multiple expansion.

-Coffee can portfolio can be a good 100 bagger strategy. Pick 10 stocks that you intend and will keep for at least 10 years. Why? 100-bagges need TIME to become 100-baggers. You need to be patient and hold on and not be tempted to sell. In average it takes the stock 25 years to become a 100 bagger.

-Buy right and hold on for a very long time.

Typical attributes of a 100 bagger stock:

-Huge EPS growth + P/E expansion makes the 100 bagger. Growth is the keyword.

-Beaten down stocks, forgotten stocks that returns to profitability can also become 100-baggers.

-Insider ownership! Most 100-baggers had insider ownership. Skin in the game. Management interests aligned with investors.

-Small size. Smaller is better. Because the potential for growth is bigger. The law of large numbers dictates that a stock like Apple or Google cannot become 100 baggers from their current size. At least that is highly unlikely.

-High quality business+management. Management very important for small companies. More so than large companies. Management should be good capital allocators. Opportunistic share buybacks to increase returns to shareholders.

-Longevity in quality and growth

-Should preferably be bought at a favourable price, because it will take shorter time to reach 100 bagger.

The typical 100 bagger stock in the paper “Motilal Oswal 100x”
-Median market cap 500 mill
-Median sales at beginning 170 mill
-Price to sales ratio of 3

Further observations:

-Most did not look cheap based on past results.

-You must look forward to find 100 baggers. You will probably not find 100 baggers by looking at the past history. Because at that time it would already be obvious for other investors that this is a high growth, high quality company and it would already be priced accordingly

-Companies with national and international markets. Because you want a product and service that can be used worldwide for maximum growth

-Rising Return on equity YoY.

-Explosive sales growth

-Preferably in an industry with headwinds.

-Sales and subscribers growth can make up for EPS growth. Netflix, Amazon and other companies that sacrifice profit in the present to take market shares and get the profit in the future comes to mind. Sometimes you need to look beyond the reported earnings.

-Netting a 100-bagger takes vision and tenacity and often a conviction in an idea that is not yet obvious in the financials

-Better with 20% growth and a 20 P/E, than 10% growth and 10 p/e. This idea is similar to Peter Lynch idea. The power of compounding makes it so that over long term the former is to prefer than the latter.

-ROE is typically above 20% for 100-baggers

-Sales growth at least 10%

-At least 10% insider ownership. 10-20% is ideal.

-Look for companies that has 20%+ ROE for the past 5 years.

-Bet big on your best ideas.

-You can find 100-baggers in all kind of industries

-Look for managers that think and act long term

-Does the company have a product or service that adds value to the costumer?

-Look for companies with the highest gross margin relative to competitors.

-Don’t compare yourself to the SP 500. Take the long term view with 100 baggers. Underperformance for several years are normal.

-Ignore the “market”, FED etc.. just focus on picking the best stocks regardless of current macro conditions. Because the macro is highly unpredictable.

-Read conference calls with the management to judge them. Don’t listen, you might get swayed by their charisma and tone of voice.

-Read several quarterly reports consecutively to see if the management is consistent with their words and actions.

-Are questions in the conference calls ever evaded? That is a warning sign.

-Best protection against freud:  High insider ownership. Beware of Chinese companies. Still freud risk even with high insider ownership.

-You need to understand how the company makes money

-Avoid the hot sectors like Biotech – Rife with freud’s.
Social media – Cloud computing etc..

-The best ideas are often the simplest.

-Find ideas that is not obvious from the numbers. Someone knows the story. Find them, or do investigation yourself.

-Invest in stocks with solid balance sheets that can survive a crisis.

-You will NOT find many 100-baggers in the deep value segment. Focus on quality first, cheapness second.

-A low multiple on the 100-bagger stock is preferred if possible. A PEG-ratio below 1 is good.

-Companies that does NOT pay a dividend is preferred. You want the company to re-invest all their profit into further growth if you have the goal to get a 100 bagger.

-Maximum market cap of 1 billion is preferable to be able to get a 100 bagger stock.

-The fastest 100-bagger mentioned in the book to 5 years. More typical 20-25 years.

-You will need also need luck to get the 100-bagger. Not easy to identify.

-When to sell a stock you think can be a 100-bagger? Almost never! Sell when it’s obvious you made an mistake. Do not sell a 100-bagger because it’s temporarily become a bit too expensive or it falls in price because of the overall market sentiment.

-Avoid stop losses. You will get sold out your 100-baggers. Expect volatile prices and large temporary drawdowns.

-Focus on the business performance and not the stocks price.

Portfolio construction  with a 100-bagger strategy:
-Carefully selected stocks. Maximum 10 stocks
-Hold for several years
-Uncorrelated industries

The stock should have a moat to be able to earn a consistently high ROE years afters years. One or more of these:
-Brand: Tiffany, Cola, Sees Candy, Monster
-High switching cost: CSVI (bank software – Core processing), Microsoft, Banks
-Network effects: Twitter, Facebook, Mercado Libre
-Lowest cost operator: Costco, walmart
-You are the biggest and can produce the cheapest (Scale)

Some stocks mentioned in the book:
-Tractor Supply Company
-General Finance

Recommended owner operator stocks:
-NVR Inc
-White Mountains
-Constellation Software

Holding companies:
-Bollore Group
-Dundee Corp
-First pacific corp

My summary/takeaways:

To find 100 baggers you should focus on:
-Look at small/micro cap stocks
-High insider ownership
-Growth! In sales and EPS
-High ROE
-Company with a moat
-You will probably need to look beyond the financial numbers. How does the future look like? What’s the catalyst?
-Hold on for a very long time.

Suggestion for a stock screen to find potential 100-baggers:

-Market cap below 500 mil$
-Sales growth 15% +
-EPS growth 15%+
-PEG below 1
-Insider ownership 10%+
-ROE this year 20%+
-Average ROE past 5 years 20%+
-Past 5 years: ROE not below 15%
-Biotech and financials excluded

Results using Uncle Stock Screener:

Symbol Name Enterprise Value Market cap
MBAP.JK Mitrabara Adiperdana 63.16M USD 144.87M USD
KELLTONTEC.BO Kellton Tech Solution 21.17M USD 23.07M USD
1126.HK Dream International L 180.30M USD 251.58M USD
1523.HK Plover Bay Technologi 117.44M USD 143.88M USD
CHEMCRUX.BO Chemcrux Enterprises 8.29M USD 9.26M USD
0240.HK Build King Holdings L 57.68M USD 134.62M USD
2124.T JAC Recruitment Co., 313.46M USD 397.18M USD
3966.HK China Baofeng (Intern 422.79M USD 209.91M USD
MRSS.BO Majestic Research Ser 2.34M USD 921.17K USD
8076.HK Sing Lee Software (Gr 17.80M USD 20.39M USD
PONDYOXIDE.BO Pondy Oxides And Chem 30.67M USD 13.60M USD
SUYOG.BO Suyog Telematics Ltd 41.59M USD 37.49M USD
ICP1V.HE Incap Oyj 66.60M USD 69.27M USD
GMBREW.NS G.M.Breweries Ltd 96.16M USD 94.84M USD
FBF.V Fab-Form Industries L 2.52M USD 3.11M USD
SUPRAJIT.BO Suprajit Engineering 283.90M USD 285.79M USD
BLUECHIPT.BO Blue Chip Tex Industr 4.38M USD 2.34M USD
6556.T Welbe, Inc. 326.09M USD 343.25M USD
CL1.AX Class Ltd 105.72M USD 117.32M USD


Green Plains Partners 340.33M USD 173.70M USD
VALIANTORG.BO Valiant Organics Ltd 333.00M USD 321.01M USD
3679.T ZIGExN Co., Ltd. 286.77M USD 326.27M USD
AHLUCONT.BO Ahluwalia Contracts ( 174.43M USD 192.86M USD
SHRDAIS.BO Sharda Ispat Ltd 3.62M USD 2.54M USD
6071.T IBJ, Inc. 243.04M USD 241.47M USD
PSPPROJECT.NS PSP Projects Ltd 176.74M USD 202.27M USD
KNRCON.NS KNR Constructions Ltd 474.24M USD 381.36M USD
FSMART.BK Forth Smart Service P 185.36M USD 154.20M USD
0150.HK Hypebeast Ltd 207.58M USD 205.99M USD
SALASAR.BO Salasar Techno Engine 50.46M USD 31.49M USD
LUMAXIND.BO Lumax Industries Ltd 198.67M USD 155.59M USD
S11.BK S 11 Group PCL 229.39M USD 103.33M USD


Wavestone SA 515.14M USD 454.82M USD
INDOAMIN.BO Indo Amines Ltd 43.33M USD 28.21M USD
TEJNAKSH.BO Tejnaksh Healthcare L 6.71M USD 5.96M USD
JIYAECO.BO Jiya Eco-Products Ltd 8.12M USD 5.39M USD
3772.T Wealth Management, In 169.83M USD 79.10M USD
CALCOM.BO Calcom Vision Ltd 4.33M USD 3.60M USD

How to screen for high quality stocks with stock screeners

A guide to how you can screen for high quality companies with stock screeners

Investing in high quality compounders can be good for your wealth. The key is to find them, save them in a watchlist and wait to buy them until they are sold at an attractive price.

I will explain my process on how I search for these types of stocks and how I organize them into a watchlist. The reasons why I like to focus on high quality stocks vs cheap mediocre stocks when screening are these:

High quality stocks:

They’re quality is more likely to be of a permanent or sustainable nature vs a cheap stock which might be attractive only because it cheap. When the mediocre stock is not cheap anymore you need to sell it. So cheap mediocre stocks are not compounders for the long term. A stocks cheapness can be very fluctuating (Just look at 52 week high/low), but the fundamental data and history of a high quality does not change or fluctuate much.
If the watchlist contains only stocks with the “quality” of being cheap, you would need to frequently update and change this watchlist, but a watchlist of high quality stocks regardless of price is more permanent, and you will not need to change it frequently.

To find these types of stocks I use stock screeners. My favourite stock screener at the moment is Unclestock Screener.  It contains a lot of great metrics to screen for to find high quality stocks. The registration is free and you can use it for a few weeks before the free trial is over. Still that does not matter much as we just want to make a database of the highest quality stocks that has permanent qualities, so you don’t need to screen frequently for changes in stock prices. You can also export you screening results to Excel, so that you can save your results and do you analysis of the stocks at a later time.

When you screen for a high quality stock you want to use:

– As few variables as possible – You want to keep things simple and not too complicated
– The most important variables for assessing the quality of a company
– Factors that determine how much stability there is in the profits of the company. – You want this because a stable company is also a company that is easier to predict what is going to earn in the future, and you are also able to put a intrinsic value on the stock.

So in Uncle stock Screener I use these variables because I think they are the most important for determining the quality of the company. They also make logical sense.
You want to screen so that you rule out companies with cyclical earnings, so the focus is on stability in the financial numbers.

I always look at the longest financial history that is available in the stock screeners. Usually that is 10 years of data.


Metrics and targets that is indications of a high quality company:

-Revenue increases: Number of years of increase in revenue past 10 years.
Target: 10/10 years with YoY increase.

-Revenue 10y CAGR: How much the compounded growth of revenue has been the past 10 years. You want to see the company grows it’s revenue over time.
Target: Above 5%

-Free cash flow positive years: You want a company to have positive free cash flow most years.
Target 10/10 years

-ROIC 10y average: (return on invested capital). This is a good metric too see if the company is a compounder.
Target is above 15%

-ROIC 10 year weakest: This is a metric that will show how much stability there is in ROIC.
Target the lowest year should not be below 10 %

-EPS positive years: You want the company to have no years of negative EPS.
Target: 10/10 past years with a positive EPS

-EPS 10 year CAGR: How much the compounded growth of EPS has been the past 10 years. You want to see the company grows it’s EPS over time.

-Free cash flow 10y CAGR: A high quality company can grow its free cash flow over time
Target above 5%

-Cash flow coverage ratio: How much cash flow from operation is in relation to total liabilities. You want a company that can pay down it’s total debt in short time if they wanted to. Target CFC more than 30% of total liabilities.

The reason I don’t use other solvency and liquidity ratios than the Cash flow coverage ratio is that there are different capital structures between industries. Strong companies can have a high debt/equity ratio, but still be in great financial shape, because their strong cash flow can easily cover their interest payments as an example.

Also notice that I don’t use any valuation metrics for cheapness like P/E etc at this stage, because my goal is just to make a list of the highest quality stocks regardless of today’s valuation. I don’t want to exclude great companies just because they are currently not cheap!

And here is an Excel file with the results from the screening:
Here is a screenshot from Uncle Stock Screener with the variables used:

Uncle stock screener

As you can see in the Excel file:

– Only 31 companies made the cut out of 8201 companies in the screeners coverage of USA and Canada.

– Some companies might be familiar to you: Microsoft, Monster Beverage, Factset, Intuit and Tencent e.g. They are familiar because they have proven to be strong sustainable businesses and have become famous because of a long history of superior financial performance.

Average numbers for the stocks that was found using the screener (See Excel sheet)

-Revenue increases: 96%
-Revenue 10y CAGR: 17.3%
-Free cash flow positive years: 98.4%
-ROIC 10y average: 55.4%
-ROIC 10 year weakest: 22.3%
-EPS positive years: 99.2
-EPS 10 year CAGR: 20.3%
-Free cash flow 10y CAGR: 20.2%
-Cash flow coverage ratio: 65.9%

As you can see the numbers are high and strong. Companies with these numbers are high quality companies.

You can play with the screener and change the numbers slightly to get a different set of stocks. However I would advise you to keep rather strict criterias so that you will only get a list of great companies.

So now that you have a database of high quality companies the next step is to do a short initial analysis of the stocks in you list.

For this purpose I use the great service Here you can look at a companies 10 years of financial history in a fast and efficient way.


I go through my list of stocks that i gathered from the screening process and I look at the business description to understand what the company does. I also look at stability in the numbers like operating margin and ROIC. I also make sure that the company has no years of EPS losses and that they have a positive free cash flow most of the past 10 years. If everything looks good and confirm that this is a quality company I will continue to

Here I will first look at the longest range chart for the stock to see if the stock has “worked out” over the long term. Remember that in the short term the market is a voting machine, in the long term the market is a weighing machine. So if the stocks has performed great over the a long period like 10-30 years this actually show the quality of the company. Over the long term the market will give the valuation the company “deserve”. In almost all cases the company’s that that I have screened for using metrics to identify quality is also confirmed by the long chart that it is a high quality company.
If the long term chart 10+ years shows an steady uptrend then its good and I take a quick look at the debt metrics like cash to debt and interest coverage to see if everything looks fine.

Example from the stock Monster Beverage that was found in the initial Uncle stock screening:

Since the stock has passed all the “filters” for a quality stock I will then include the stock in the watchlist in Gurufocus portfolio tool. The tool is free to use, but you need to register with Gurufocus first.

This is the watchlist I use to keep track of my favourite stocks. You can make a big watchlist of high quality stocks and make different “views” that shows different metrics. I like to include similar quality metrics like I used on the Uncle Stock screener, but I will also include things like insider ownership and different valuation metrics.



Now you have a watchlist of quality stocks and you have saved them and can track them. The next step is to probably to get more familiar with the company, understand what their business model is and if they have a sustainable moat. There are no guarantees that the companies in your watchlist will continue to be great the next 10 years, but at least the history shows that the company has proven itself, and make it more probable that it will continue with performing well in the future. This make it also easier to assume and predict growth rates for the company for the future which is vital for having confidence in the valuation of the company.

You can go through your list and learn as much as you can about the company if you are willing to do the work.

The final step is figuring out what you are willing to pay for the stock. It’s all about price in relation to quality. The highest quality company in the list might be the company that you might be willing to pay the highest price for and it will still be a great long term investment. Still you want to pay an low price in relation to the quality since you want to have large margin of safety in case your assumption of the company’s future quality is wrong.

There are many ways to value a company but a shortcut can be to look at valuation metrics like: P/E, EV/EBIT, EV/FCF.

You can also use a tool like The Warren Buffett Spreadsheet which uses more advanced valuation models to calculate intrinsic value for stocks.

When you have figured out a price or valuation metrics that will make you want to buy the company the last and final thing you want to do is to make an price alarm with e-mail alert in Gurufocus. The e-mail alert in Gurufocus lets you set up an price alarm for price and also for whatever metric you want to. Like for example when the company is sold for a EV/EBIT below 8 as an example.

So for each stock in your watchlist you can make an email alert on price or the metric you want. In this way you don’t need to constantly check these stocks for their price and valuation, but you will automatically get notified when they reach your desired buying price.

The purpose of this watchlist is to be prepared to buy high quality stocks the next time there is a crisis with similar magnitude like the financial crisis, Corona crisis or whatever crisis that will come in the future. It will come more of them in the future and you should be prepared by knowing which stocks to buy and at what price.




How to reduce investing stress

11 habits and strategies for reducing investing stress


In investing we are our own worst enemy. Researchers have found out that we make many behavior mistakes when investing our money. We become irrational and make silly decisions. This behavior is because of our lizard brain that acts fast in situations where we feel fear or stress. This behavior helped us survive and thrive on the african savanna, where being fearful was beneficial for survival. However in the stock market, we need to tame that part of the brain if we want to reduce stress and get a good return on our investments at the same time. What worked on the savanna does not work in the volatile stock market! Remember that Warren Buffett said that temperament is more important than high IQ in investing. I agree I think controlling our own behaviors and limit our mistakes is at least 50% of becoming a better investor. I think this topic is often ignored in the investing world, where most of the focus is on which stocks to pick and when to buy and sell, and not how to behave.

In this article I will share my collection of different habits and routines you can incorporate to tame your inner monkey. These suggestions come from different books on behavioral finance, my own habits and mental models. I also think its more important to focus on behaviors to avoid rather than behaviors you want to have. This idea I got from Nassim Taleb’s concept calles via negativa in his book Antifragile.


1. Know yourself before you choose your investing strategy
We have a different personalities and investors should find an investing strategy they are comfortable executing. I recently listened to Monish Pabrai and Guy Spier discussing this topic and Guy Spier said that he and Monish had different volatility tolerance. Guy would get uneasy with Monishs’ strategy of a concentrated portfolio and a high volatility and would probably not be able to successfully execute a strategy like this with his type of personality. Guys portfolio has more stocks and it’s not that concentrated as Monish, hence lower volatility. Both strategies works, but you want to find a strategy that fits your personality and that will limit your stress the process. If you are not willing or have interest in analysing stocks I would recommend index funds, instead of trying to pick your own stocks. It’s important to know the limits of your expertise and knowledge.


2. Never invest with money you will need the next 5 years.
Never invest money in the stock market if you know you will need them in the near future. You can never know or predict the short-term returns in the stock market. If you are forced to sell off stocks to cover your need for money you will expose your self too much unnecessary stress and worry. Also keep enough cash in your liquid bank account to cover your bills and living expenses for at least 3 months, before considering investing in stocks. You need to increase your robustness before you expose yourself to risk.


3.  Do not check your portfolio statement unless you must buy or sell a stock. 
The less often you check your portfolio the better return and the less stress you will feel. The reason for this is that our amygdala reacts with fear when we see and experience losses. That include financial losses, even if they are not realized losses. The research shows that we feel more than twice as worse seeing a loss than what we feel when seeing an equal amount of gain. And from day-to-day the returns on your stocks in your portfolio is very random, it’s around 50/50 chance of the portfolio to show either a loss or a gain. So that means if you check your portfolio every day you will feel the losses twice more strongly than the gain. That means that even if you over time has a positive return over the longer term, being exposed to the days with the negative returns will far outweigh the positive days, potentially making you feel miserable even you will get a good return over the long-term.

Another effect of checking your portfolio frequently is that it can lead to over-trading. And trading cost trading fees and taxes, which is a negative drag on your returns of the longer time. Research showed that on average the investors with the best long-term returns on their portfolio where the one that had forgotten they had a portfolio!, and people who had deceased!. That says something about the benefit of limiting the exposure to your portfolio statement. There are no need to check your portfolio or stock prices frequently if you are a long-term investor. What happens on a daily, weekly or even monthly basis is just noise. Companies does not change this fast. Meaningful changes in companies happens quarterly and annually. That’s why exposing yourself to randomness and noise has no purpose.

How to check your portfolio less frequently?
– Buy and sell stocks less frequently
– Do not check your portfolio unless you must buy or sell a stock.
– Make an automatic price alarm on the stocks that you already own. If one of your stock reach the buy or sell target you can act, in the meantime you will not need to check the prices frequently. Gurufocus has a good tool for that.
– Remove portfolio tracking tools on your smart-phone and your computer.


4. Avoid being exposed to frequent news about the stocks you own
Most investors want to follow the daily news stream on the stocks they already own. The problem with this is the same as with the changing stock prices, most of the news is just noise and not a signal you should act on. Being exposed to the news will give you the feeling of urgency and the wanting to act, that is buying and selling too frequently. This also applies to daily indicators that has an effect you your stocks. It can be oil prices, iron prices, freight rates etc..

I think exposure to news about your stocks will have a similar effect as checking your portfolio statement will have on you. A stock will have its 50/50 percent amount of positive and negative news. However you will feel twice worse about the negative news than happy about the positive news. Sometimes ignorance is bliss, especially in investing.

My advice is to only check the news about your stocks on a monthly or even quarterly basis. Remember the most important news about your stocks are the financial statements from the companies, not the frequent speculations by people on how stocks in your industry will perform the next weeks and months. A quarterly or even annual review of your stock should be just fine if you are a long-term value investor.

I am at the opinion that your return will come from picking great stocks and holding them. So that means after you have done your research and bought a stock 90% of your job is done! You should get your return from initially having picked a great stock, not from timing your selling of the stock. After buying a stock you should be less interested in tracking this stock (your decision has already been made), and instead focusing your time looking for new stock ideas.


5. Buy and sell stock less frequently
You only need a few really good stock ideas in your whole investing life to get an outstanding return. It’s stressful to constantly buying and selling stocks, because you will always have to find new ideas. Really good ideas are seldom and if you find 100s of ideas per year you are doing something wrong. A better approach is to try to find only 1-2 great ideas per year. Stocks that you are the most confident about. Be patient, sit on your ass and wait for the great opportunities. There should be no rush in investing. Be comfortable doing nothing for long periods of time.


6. Avoid frequent exposure to stock forums and message boards discussing stocks

It can be addictive to read other people’s opinions on stocks you also owns, however
On many of these forums you have no idea about the knowledge level of the participants, their motivation for what they are saying, how correct the information is and their skin in the game. Most of the talk on these forums are noise,  short-term thinking, speculations and potentially fear inducing.  I recommend you to either not using them at all, or check them very infrequently. Maybe in your initial research of the stock, when you want to gather information about the company, but not much after you have bought the stock. Remember you will be correct if your analysis of the stock is correct, not the opinion of other people. You need to be independent in your research.


7. Never borrow money to invest in stocks
Leveraging your portfolio will make you fragile and increase your stress levels. Your return can of course increase, but your risk will also increase. You will have to pay interest on the money your borrow which is not pleasant.


8. Never short stocks
Mathematically shorting stocks does not makes sense. When you go long a stock the potential upside is unlimited. When shorting a stock the potential upside is only 100%. Also the long-term stock market return is positive and stocks tend to increase in value and price over the long-term so shorting stocks is a poor strategy and it will likely increase your investing stress. You will never be able to predict the gyrations of the stock market, and you might in the end be correct about your short, but in the meantime you will expose yourself to a theoretically unlimited downside, and maximum 100% upside. You will also never know for certain that if the company you are shorting is getting bought out at a higher price than what you have shorted the stock.


9.Turn off CNBC and other sources of financial news
This type of news is mostly useless noise. It’s about macro issues and politics which are nearly impossible to predict and it’s also not easy to have an informational edge, because you have an army of other economists and people who also look and analyse the same data. Your edge is knowing the micro side of the business, not the macro. The people talking on these financial news channel are trying to predict the future of the economy (which they can’t) and they try to come up with reasons for every uptick or down-tick in the market. You will be much better off reading companies annual reports and learning deeply about different businesses than reading or watching financial news.


10. Accept that you can’t control the outcome of your investments, only the process.
You need to accept that investing is not pure skills like chess, but also have a portions of luck and random events that you can’t control or predict. You should focus less on the outcome, especially in the short-term and rather focus on having a good and disciplined process. In the short-term your returns can be poor even if you have a good process and decisions. However in the long-term a good process will give you more good outcomes than bad, and your returns will likely be good.


11. Cultivate a healthy lifestyle
Sleep enough, exercise, eat healthy, go for walks in nature, meditate, read good books, spend less time online, limit your exposure to useless information, take frequent time off from investing related activities. No explanation needed.


Hope this article gave you some ideas on how to behave more smart in the stock market.

What are your recommendations on strategies for reducing investing stress ?


My behavioral finance book recommendations:

  1. Misbehaving: The Making of Behavioral Economics
  2. The Little Book of Behavioral Investing: How not to be your own worst enemy

  3. Inside the Investor’s Brain: The Power of Mind Over Money

  4. Seeking Wisdom: From Darwin to Munger, 3rd Edition 




How to analyze stocks – Fundamental stock analysis

Fundamental analysis of stocks is to analyze the historical financial numbers of a company to assess the quality and the price of a stock. The numbers are taken from the income statement, balance sheet, and cash flow statement.

There are no set rules on how you analyse a stock. Stocks in different industries and different types of stocks should be analyzed differently. So you must analyze a deep value stock differently than a high quality fast growing stock.

I will in this article go through important financial numbers that you should look for and calculate when you analyse a high quality company and why these numbers are important.

When you analyse a high quality company you should always try to get at least 10 years of historical financial data. If you can find even longer period the better. You can use and for getting the important financial data.

If you want even faster and better analysis of the fundamental data you can take a look at The Warren Buffett Spreadsheet. It will automatically import the financial data into a spreadsheet and do all the calculations for you in a few seconds.

So let’s go through the financial numbers that I recommend you to analyse to assess the quality of the company. Remember to always look at the average or median over a 10 year period for the financial data.

With the key numbers I mention here, always look for stability in the numbers, the less fluctuation from year to year the better.

Here is an example of a company I think fulfill most of the quality targets that I have outlined below:

The stock is FAST and the company name is Fastenal Co


Links to financial data:

I will compare this company numbers with my target numbers below.

Numbers for this company is from february 2019, so they may be different for this company when you read this article.

All data in tables below are from The Warren Buffett Spreadsheet


ROTC: Return on total capital
This is the net income the company is producing on its total capital ( total equity+debt) This shows the profitability of the company and how efficiently they are operating
If the company also can grow its ROTC over time it’s a sign of a strong company.

Target: above 12%
FAST: 25%! (10y median)
Growth rate: 1.5%

Efficiency growth rate Median 10y growth over different time periods.
ROTC 1.5 %

Free cash flow/sales:
A measure on how efficient to company is translating is sales into FCF. A company with a avg value above 10% is very profitable and probably has a moat of some kind. A moat is a sustainable competitive advantage that makes it able to earn a high return in the future even with more competition from other companies. If the company also can grow its free cash flow of sales over time it’s a sign of a strong company.

Target: above 10%
FAST: 9% (10y median)
FCF/Sales growth: 6.0%

Efficiency growth rate Median 10y growth over different time periods
FCF/Sales 6.0 %

Margins: Gross margins, operating margins, net profit margins:

In general you want to see positive and preferably high margins. You want to see high margins because that makes the company less fragile for losses compared to a company with razor-thin margins. However there are no absolute target for margins as companies in different industries has different margins. You want to see stability in the margins or even gradually increased margins. This is indications that the company has a moat.


FAST: Median numbers:
Target: Positive and stable margins. Preferably high margin numbers.


Efficiency TTM 10y avg 5y avg
Gross margin 48% 50% 50%
Operating margin 20% 20% 21%
Net margin 15% 13% 13%
Margins growth rate Median 10y  growth over different time periods
Gross Margin -0.8 %
Operating margin 0.2 %
Net margin 2.3 %

Earnings growth:
Ideally you want to see a company that is growing its free cash flow, sales and net income over a 10 year period.

Target above 10 growth%

FAST: Median past 10 years:

Most important numbers in bold letters

Growth rates Median 10 y growth over different time periods
FCF (Free cash flow) 16%
Sales/revenue 9%
EPS (Earnings per share) 12%
Book value growth 8%
Operating income 9%
Operating cash flow 12%
Dividend 10y growth 18%



Earnings stability:
I look for companies that has no negative EPS or free cash flow for the past 10 years. Also I like to see steadily growing sales and EPS. No negative EPS usually indicates that the company is not cyclical and a positive free cash flow can indicate that the company has plenty of cash to pay down debt, buying back shares, or paying a dividend to shareholders. Exceptions to this is for very fast growing companies, where the free cash flow can be negative for several years without indicating that the company has any problem. However I ideally prefer companies with a positive free cash flow the past 9/10 years, because they are generally more mature and stable than companies that has a several years with negative free cash flow.

FAST: Past 10 years:
Target: 9 of past 11 periods with a positive number and years of growth.

Most important numbers in bold letters

Earnings stability 10y Data
Years of EPS Growth 9
Y’s of positive EPS 11
Y’s of revenue growth 10
Y’s of FCF Growth 6
Y’s of positive FCF 11
Y’s of dividend growth 11
Y’s of dividend paid 11
Y’s of oper. inc. growth 9
Y’s of pos.operating inc. 11
Y’s of O.C.F growth 7
Y’s of positive O.C.F 11


Financial strength:
For high quality companies I am not so concerned about the D/E ratio. However I always take a look at the interest coverage ratio. This  ratio show how many times the operating income can cover the interest payment on long-term loan. So a company can have a high D/E but a very strong sustainable cash flow which can easily cover the interest payment.

Targets (TTM):
Y’s to pay debt with net.Inc – Below 3 years
Y’s to pay debt with FCF – Below 5 years
Debt/Equity – Below 0.5
Current ratio – Above 1.5
Interest coverage – Above 5
F-Score – Above 5
Z-Score – Above 5
M-Score – Below -2.22

Most important numbers in bold letters

Financial strength TTM 10y avg 5y avg
Y’s to pay debt with net.Inc 0.7 0.3 0.5
Y’s to pay debt with FCF 1.0 0.4 0.8
Debt/Equity 0.2 0.2 0.2
Current ratio 5.3 5.9 5.1
Interest coverage 79.3 251.1 285.4
F-Score 5
Z-Score 15
M-Score -2.3


Capex requirements: (capital expenditures):

Capex of operating cash flow (10 year average)
This is a ratio that checks how capital-intensive the company is. How much is use on capex in relation to its operating cash flow. In general a low capex company is more attractive than a high capex one.

Target is below 30%
FAST: 32%

Most important numbers in bold letters

Checklist ratios TTM 10y avg 5y avg
Dividend safety 1.5 1.8 1.6
Net Inc of cash from operation 111% 103% 100%
Dividend payout ratio 59% 58% 63%
Capex of operating cash flow 26% 32% 30%
Cum. capex of Cum. net inc 30% 26%


Other important factors you should look for:

Shares outstanding:
You want to see a gradual decrease in shares outstanding over the past 10 years. It’s an indication that the management is shareholder friendly by buying back its own shares. This will increase the value of your shares as there will be fewer shares and the earnings per share will increase because of that. However you should figure out the timing of the companies buyback. If they did buybacks when the shares where cheap (Like in 2009) they are good at capital employment. However look out for companies that buy back shares when the company is expensive in relation to its intrinsic value. Also you don’t want to see companies that has massively increased its number of shares the past 10 years. In that case it’s likely that the shareholders ownership has been diluted.

Target: Reduced number of shares in the past 10 years.

FAST: 0.4% reduction. ( Positive number is good)

Most important numbers in bold letters

Share buybacks rate Data
10y 0.4 %
5y 0.7 %
3y 0.2 %
1y 0.0 %

Insider ownership:

You want to invest in companies that has a management that is invested in the stocks themselves.  So then their interest is aligned with your interest, and that is caring for the company and make sure the company is performing well. Skin in the game. No insider ownership and the management might not care too much on how the company perform, which is a disadvantage for you as an owner of the stock.

Target: above 5% insider ownership
FAST: 4.56%


Insider buying:

When its comes to conviction and timing of buying this one is a strong indicator. If you see the management buying a lot of shares recently you can be sure that the management has a believe that the shares are undervalued and the future of the company is promising. Why else would they invest with their own money in the shares?

If you see many different people in the management buying and buying a lot of shares and in high percentage of their net worth it’s even better. On the opposite, if you see a massive amount of insider selling, you should be careful about the timing of your purchase or reconsider even buying the shares., there might be some big problems ahead for the company if you see many in the managment unloading lots of shares.

FAST: No recent substantial insider buying and no recent big insider selling.



Fastenal is clearly a high quality company based on the numbers. It has a moat, and it’s likely that this company will show great probability also in the future. The stock price will in the long-term always catch up and reflect the fundamental performance of the company, so in the case of Fastenal Company the company has given the shareholders the following long term fantastic returns:

Since september 1987: +48.254%
Past 10 years: +264%
Past 5 years: +40%
Past 1 year: + 15%

(Numbers taken from chart)

Remember that analysing the past 10 years of data is analysing the past! In investing its the future that matters. Sure the past 10 years of data will give you very valuable information about the quality of the company and there is a high chance that the good performance will continue, but you can’t be 100% certain of that. Because of that I recommend you also to read the companies annual reports to figure out if the company has a sustainable moat or not. A sustainable moat means there is some special characteristics of the companies that let its continue to earn a high return on its capital in the future even with increased numbers of companies entering the industry.

When you have found such a company, you need to wait and be patient until the company is sold at an attractive price in the market.

By the way, Fastenal looks fairly priced today (13.02.19) in does not seem to offer very attractive returns at the moment. However if the price of this company would drop because of a stock market crash or something similar that won’t permanently hurt the company it seems like a very solid company to consider buying at the right price.

Consider putting it on your watchlist for stocks to buy during a downturn or market crash!






Investing lessons from Peter Lynch

Recently I have been reading 2 great books from Peter Lynch. One up on wall street and Beating the street. Both are great books and packed with advice for investors and examples of investments that went well and the ones that did you turn out good. There is not so much difference between the books, but for the beginner I would recommend to begin with one up on wall street. It’s more general, while beating the street has more specific examples of investment cases.

Peter Lynch is one of the greatest investors of all time and his track record is impressive. I noticed that there is much overlap and commonality between Warren Buffets investing wisdom and Peter Lynch’ wisdom and a lot of it is common sense in investing.

The books are fun to read with plenty of humour in them. There are no investing secrets in these books. To earn beat the market in the long-term, you need to do your homework and really understand the companies you are buying. Peter Lynch was known to work his ass off.


Here are some of my notes and keywords from the 2 books:

-Ignore the market, focus on business, not the general economy, politics and macro issues. You can’t predict the macro too much degree, and there are too many people analysing this, so there is very difficult to earn a good return on having some special insight on the macro economy. In contrast you can be able to have an edge looking at a small micro cap business that not so many is knowing about. You need to hunt for value in areas of the market where there is less competition!

– Develop a stock thesis/story for each stock you buy. Write it down. Follow the story of the stock as the time go. Does the story turns out like you expect? You need to know the reasons why you bought the stock and what you expect will happen in the future. This can be easy to forget so you should write it down. If the story does not turn out like you predicted you might want to sell the stock and learn from your mistake and avoid to to that mistake again.

-Put the stock in the correct category: Slow grower, stalwart, fast grower, cyclicals, assets plays, turnarounds. Knowing the type of stocks you are analysing and buying makes you know what to put weight on in your analysis (ratios) and also what you can expect the stock to behave like in the future.

-Invest only in simple business that it’s for you to understand. You need to understand how the company earns money and the factors affecting it. If not you will not be able to be confident in the long-term about the stock, you will also not know if it is smart to add more to a position if the stock price goes down, vs a person that understand the company. If you don’t understand the company you will be too affected by the “market” and the markets pricing of the stocks, since that will be your measurement of the success of your investment.

– Choose stocks with boring/dull names. Stocks with boring names gets more easily ignored by the market. Stocks with hot names these days like element, bio, crypto, tech etc.. draws more attention and are more likely to be overpriced.

– Choose companies that do something dull. Most investors gets exited about new technologies and things that might revolutionize the world. However these stocks usually does not provide the best returns unless you are very lucky with your picks. Companies that deals with garbage, pest, waste, dry cleaning, funeral service etc.. is drawing much less attention but still can be fantastic business to invest in.

– Consider choosing companies that does something disagreeable. Like cigarettes, addictive products. It’s usually less investors investing in these.

-Spinoffs can be great investments. Usually investors and funds will sell these spinoffs when they come into their account because of funds mandates or because investors just get another company into their account and the just sell off without considering the company. This can create opportunities for the diligent investor.

– Choose good stocks in non-growth industries. Again less competition from other investors and also less new startup business that will disrupt the industry.

– Look for niche companies. Companies that do something very specific that not many other companies do. Where they are the leading company with the biggest market share. Like for example Tandy leather factory

-Look for companies that sells a service or product that people MUST have and that they will buy again and again. (Cola, cigarettes, shaving blades)

-Invest in companies that will benefit from technological advancements, not companies that will get disrupted by improved technology.

-Look for insider buying in a company. That is usually a very strong sign that the company is doing well and that the management believes in the future of the company.

-Share buyback. Companies that is buying back shares when the stock price is low is doing good capital allocation, because the value of your stake in the company will  increase. However companies that buyback at high prices is destroying shareholder value.

-Invest in stocks that has a history of positive earnings! Don’t bet on the long shots and lottery ticket stocks.

-When cash exceeds debt it’s very favourable.

-Look at historical P/E values for the company you consider investing in. Are the current P/E high or low compared to historical P/E?

-If you underperform the S&P 500 index for more than 5 years or more, consider throwing in the towel and just put your money in an index fund instead and save yourself the work of investing.

-A portfolio for the private investor should consist of 3-10 stocks. You don’t want more because you need to know a lot about the stocks you own and keep updated on they story. If you keep 20-100 stocks you have not chance to know all of them very well and your returns will be too similar to an index fund.

-Don’t sell a stock too soon. Typical investor mistake. Cut the weeds and water the grass! Track the fundamentals, not the stock price.

-Sell a stock when your stocks story has played out or is no longer valid.

-Better to buy a 20% grower at 20 p/3 than a 10% grower at 10 p/e (because of the compounding effect)

– Compare business in the same industry with EBIT margins

-You want a relatively high profit margin company to its competitors in a long-term holding. In a shorter term turnarounds, a low profit margin gives a higher  % stock price/profit increase than a higher margin competitor.

-Review your portfolio companies story every few months.

-Fast grower stocks: Growth rate of 20-25% is ideal. Higher than 25% is not preferred.

-Look for companies where the EPS growth is higher than the P/E ratio. A sustained EPS growth rate twice the current P/E is ideal.

– Look for hidden assets in stocks. Understated value on the balance sheet, operating loss carryforwards, companies that owns shares of other companies, goodwill that has been written down to 0, but is still valuable.

-Look for companies that can raise their prices year after year without loosing customers. Like for example Phillip Morris (PM)


Stocks to avoid:

– The hottest stocks in the hottest industry. Usually insanely overpriced.

– Beware the next “something”

-Avoid companies that acquires unrelated business

-Beware of “whisper” stocks. Stocks with promising technology that is going to save the world. That is usually stocks with no substance.

-Beware of stocks with only one customer. Things can turn bad if they lose that one customer.

-Beware of stocks with exciting and cryptic names.

-Avoid stocks with very high P/E’s

-Be aware of capex insensitive businesses.

-Be aware of inventory buildup in retail companies.

-Be aware of companies with pension plans, especially in turnarounds.


Peter Lynch checklist:

– Can the company expand successfully? To other states? To other countries? Is there more room for expansion?

-How does the companies headquarter looks like? The more simple and mundane their HQ looks like the more promising the company is. Companies that “waste” a huge amount of money on an impressive building is usually not a good stock, because they will probably spend money on themselves instead of the shareholders.


Turnaround checklist:

-How much cash does the company have?

-How much debt?

-What is the debt structure?

-How are they going to turn around? (Cost cutting, selling of unprofitable business)


If you want to do fundamental analysis of stocks and determine the quality and intrinsic value of stocks you can check out the Warren Buffett Spreadsheet


What is value investing?

Here is my views on what value investing is:

Value investing is to buy a stock for less than its intrinsic(fair value) value. To do so you need to be able to value the stock so that you can estimate the intrinsic value. If you can’t value the stocks in some way, then I would call it speculation and not value investing.
Remember that when you buy a stock you buy a small part of the whole company and not just a ticker symbol. If you wouldn’t buy the whole company(if you had the money) you should not buy a single share of the company. You sell the shares (company) when its stock price is substantially above the intrinsic value. You repeat this process again and again over the decades with each stock you buy. Value investors analyze the fundamental characteristics of the company (financial statements) speculators invest based on the recent price action of the stock with no regards to the fundamentals.

Why do you want to use a value investing strategy?
Simple: It’s a strategy that has been proven to give a very high return and beating the market for many decades.

Why does value investing works?
Investors tend to overreact to bad news and headlines of a company and at certain times stocks are sold off regardless of their value, creating a oppertunity for value investors to buy companies for much less than what they are worth. Over time the market realize its error and will later at some time price the stock correctly (at its intrinsic value)

Here is an illustration that shows what value investing is:

wmt intrinsic value

As you see from this graph WMT (Walmart) from 2001-2010 has from 2001 to 2007 has had a price higher than its intrinsic value. (not a good time to buy) But during this time the intrinsic value of the stock has grown while the price has been stagnant or even dropping somewhat. because this is a high quality company and the intrinsic value has steadily been growing.

As you see in 2007 the intrinsic value became higher than the stock price and until 2010 was growing faster than the stock price. (probably a good time to buy)

Some stocks are  difficult to value, because they are small fast growing companies, concepts stocks, cyclical commodity companies or just very poor quality companies. The future of these companies are very difficult to foresee, so it’s in many cases best to ignore companies you can’t value with confidence. They can of course be great investments but its much harder to analyse them and their success is more determined by luck and events that we cant foresee or predict.

So when you look for companies to value I advice to look for companies that you actually can estimate what they will earn in the future. That means that in general you should look for companies with these characteristics:

-Companies with a moat (sustainable competitive advantage) You want companies with a moat because these companies are more likely to increase their profits and intrinsic value over the next decades.
-Stable earnings growth past 10-20 years
-Stable margins (gross, operating and net margins)
-Low debt (less chance for the company to get into trouble and destroy value (intrinsic value)
-Good management ( You want a managment that is shareholder friendly and allocate the capital in the best possible way)
-High return on invested capital (indicate a moat)
-Positive and growing free cash flow past 10 years (Free cash flow can be used to pay a dividend to shareholder, pay back debt, invest in the business, buyback shares)
-History of share buyback at the correct times (when the stock is below its I.V) (This indicate that the management is a smart capital allocator)

You can look for these companies and analyse them in a fast and easy way with The Warren Buffett Spreadsheet

Value investing spreadsheet
Value investing spreadsheet


Companies with these characteristics are high quality companies. These are in general the companies you want to look for. The reasons are many:

-More likely that you will be able to hold and not sell during a bear market
-These companies tend to grow their earnings and then also their I.V over time, so time is the friend of the high quality companies and enemies of the poor quality companies.
-Less turnover in your portfolio ( you can probably hold these companies for 5-20 years)
-Less stressful to hold these companies(easier to be relaxed when you know that your portfolio consist of high quality companies that will grow their value over time)

Of course you need to buy these companies when they are on sale, that means not necessarily when the stock price has dropped, but when they are selling for substantially less than their intrinsic value. So how much is substantially? That depends on the predictability and quality of the company. With a high quality company you can allow yourself to buy with a 25% margin of safety. That is a price that is 25% lower than your estimated intrinsic value. For a lower quality company or a company operating in an industry where the future profits are harder to predict you want to have a higher MOS, maybe up to 50%.

Margin of safety is an important concept in value investing. You don’t want to buy the stock AT its intrinsic value, you want to buy it for LESS. You want to this because bad things can happen with the company that lower the intrinsic value of the company, so you want to have a MOS as a buffer in case the company does not perform as you expect.

Remember also that investing is a game of probabilities and nothing is certain. That means that you should diversify with at least 5 stocks.  You want to be better than market on the average. In a 10 stock portfolio you can expect at least 3 of them to underperform, but as long as the other stocks perform well it will offset the loss you got on the 3 underperforming stock. This is the interesting thing about stock investing. A stock can maximum go to zero, that means a 100% loss, but another stock in your portfolio can be a multibagger going up 10-100 fold from your buying price. Read more on why you should diversify


Also to make the value investing strategy to work you need to be:

Confident in your analysis, but still be able to change your mind if the fact change. (the fundamentals of the company change for the worse).

You need supreme patience and discipline: You need to be able to hold a stock for many years trough bear and bull markets, confidently sticking to your estimated intrinsic value of the stock.

You need to be able to be rational and sell when the fundamentals change for the company and there is no chance for improvement in the future ( like for example tech companies like Nokia and Kodak)

You need to be able to hold even if the company appear somewhat overpriced. You don’t want to sell a high quality company unless it become very overpriced.

You need to be able to sit with cash and not being invested for a long time untill you find a company with high quality selling for a low price. This can be mentally hard in a bull market when it seems like all other are making money taking big risks.

You must be able to stick to the value investing strategy even if value investing is out of fashion. In the past years growth stocks has been the hype and value stocks has underperformed. This has however changed lately. You might underperform the market for 3 years in a row with a value strategy and you must stick to the strategy to gain the long-term benefit, not jumping unto another strategy in times of underperformance.

You need to be brave and be confident in your analysis even if the market disagrees with you. With disagreement I mean that the market price the stock much lower than your estimated intrinsic value. Look here for my views on how you can beat the market.

That’s it. Who said value investing is easy? It’s not and to better your chances you should be a learning machine as Warren Buffett and Charlie Munger recommends and read some of my recommended investing books

Also check out my free value investing tools page with lots of checklists and excel spreadsheets for free download


Be a shameless cloner. Invest along with superinvestors

Don’t be ashamed to be a copycat or a cloner when it comes to investing. It can give you great long-term return while also reducing your investing stress by handing over decisions to other investors with more expertise, experience and a proven track record. You can basically outsource the investment process and thinking to these guys. Monish Pabrai who is a well know value investor, says that act of cloning other people’s best idea is a very powerful mental model. He stated in a lecture that it was 99% chance that you would do better by investing alongside the superinvestors instead of doing the stock picking yourself. I think this statement might be somewhat of an exaggeration, but I still think it’s an important statement and very important for the ones without the time and knowledge to analyse individual stocks themselves. Monish also told that he himself used the 13F’s to see what other great investors are buying and selling, and he considered it a goldmine for investors for idea generation.

One of the more underappreciated stock picking strategies is the strategy of buying and selling the same stocks as superinvestors are. Superinvestors are investors that has proven to have beaten the overall market for a long period of time. The reason why you should consider following this strategy is that these superinvestors are probably smarter than you, have more resources for doing deeper stock analysis than you and has a proven track record and more experience with picking the winner stocks. I think the main reason this strategy is not more followed is because most people think they are better at picking the winner stocks than the average investor. So they would rather do the stock picking themself than to rely on others, even if there is no data that supports that the average investor will outperform the superinvestors.

It’s also a myth that this strategy does not work because you will be too late to buy and sell the stocks of the investors you are following to get the desired returns. I have read that if you have copied Warren Buffett’s buys and sells for the last decades you would have beaten the S&P 500 with a wide margin. That is even if you had bought and sold the stocks at the worst timing after his buys and sells had been made public.

My ideas in this post comes from two books that covers the strategy of following the best investors. These two books are: Invest with the House by Mebane Faber, and Manual of ideas by John Mihaljevic.


How to follow superinvestors?
Investors that manage a certain amount of money (think it’s at least 100 mill $) have to file their stock holdings to the SEC every quarter. The filing is called 13F. This give anyone who want to look into the holdings of these investors as this is public information. Two great sources for this information can be found at and Here you can subscribe to E-mail alerts that will notify you when one of the investors you follow is filing a 13F. Another good source is as they show the portfolios of the most famous long-term value investors.

There is a delay period of up to 90 days before you can get access to the buys and sells of these investors and that it something that you should keep in mind. I will come back to that later in the checklist. Also you should now that the 13F’s only shows the US stocks that the investor owns. There might not be a good idea to put all your investments into one single country. However among the US stocks there are several ADR’s which let you be exposed to the international stocks and ADR’s will be shown in the 13F’s.


How to implement the strategy?
Basically the strategy is buying and selling the same stocks as the superinvestor that you are following. For this or any strategy to work you need to keep consistent with the strategy for at least 10 years. That means you should not jump from superinvestor to a different one just because the one you have followed has not performed as you expected for the past 1-3 years. You should also follow investors that are long-term value investors, since their strategy will be aligned with your own. The hedge fund and superinvestors have been criticized lately for not being able to beat the S&P 500 the past years. To that I will say that the indexes have been mainly driven by the F.A.N.G stocks (Facebook, Amazon, Netflix, Google), which might be overpriced. At least we can say that the SP500 is overpriced on a shiller P/E, so there is no surprise that value as a strategy and then also value investors has underperformed the markets in the recent years. This might be the time for value investors and value stocks to outperform the high-flying tech stocks and other expensive stocks in the coming years.


Here is a checklist you should follow if you want to succeed following superinvestors.


  • The investor you follow must be a long-term value investor. One way to find out this is to look at the average numbers of quarters that the investor is holding a stock. In general the longer the better. The reason you want an average holding period for the stocks is that if you are following someone with a short holding period you risk buying stocks that the investor has sold when you get their 13F stock holdings in your inbox. I advise to look for managers with a holding period of at least 4 quarters.


  • You should buy their highest conviction stocks. That means you should only buy stocks that is one of their top 10 positions in terms of % of the total portfolio. You should also look for investors that has most of their money under management in their top 10 holdings, as that would indicate that they have a high conviction in these stocks. I think this number should be at least 50%. In my opinion you should also not invest in a stock that the manager has in their top 10 holdings if the stocks total percentage of the portfolio is less than 5%. That because 5% holding is not enough conviction even if that stock is in the top 10. Some managers have 50-100 stocks in their portfolio and equally distribute the money invested among them. These are manager we probably want to ignore.


  • Consider diversifying between several investors. I would suggest diversifying between your top 5 investors. The reason for this is that if you follow just 1 investor your risk will increase. The manager can lose his motivation, he might be unlucky with his picks, he might go trough a nasty divorce that all can affect his future performance. You want to catch the average outperformance that these superinvestors are able to do, so it is wise to diversify among 5-10. So in practice you can choose 3 stocks in the top 10 holdings for each of the 5 investors. Then you will have a portfolio of 15 stocks with 3 high conviction stocks diversified between 5 investors.


  • Be aware that the research on this strategy says that choosing the top one pick among these investors have performed much worse than if you had picked their top two or lower picks. The reason for this was that the top one picks had usually appreciated a lot in price and therefore was not a good buy. The stock’s price had already surpassed its intrinsic value. I think this problem can be solved by figuring out what price the manager had bought this stock at. I know that at they inform about the estimated buyprice the manager had bought the stocks in his holding. In that way you will know if the top one holding has become the top holding because of a price increase or not.


  • Avoid investors who are macro oriented and who shorts stocks. Not really sure how you can determine this by only looking at the stocks and numbers. But usually you can Google search the name of the manager and understand more of his stock picking strategy


  • Avoid investors with a short track record. How long have they been in business? In the short time randomness and luck is the most important factor, in the long-term as more years pass luck become less of a factor and skill become more important. Choose managers who have a track record of at least 10 years.


  • Managers with huge amount of assets under management might be limited in their future returns as its limitations on how small stocks they can buy. It might be a good idea too clone investors who are not having too much money under their management as they will be more flexible in what kind of investment they can do.


  • It’s not really necessary, but it might help you if you choose stocks from the superinvestors that you also would consider good buys. That you also understand the business and the reason why you would buy this stock. If you also have a conviction it’s easier to hold onto the stocks even when the market crashes. If you have chosen stocks from the good managers, but you don’t understand the stocks it might be harder to hold onto them when the tide turns.


  • When to sell a stock can be a somewhat tricky question. You can sell the stock when the manager is selling the stock, or you can sell the stock when the stock you have chosen is no longer in the top 10 holding of the investor you follow. In that case you can replace it with one of the new stocks on that managers top 10 list.


  • There might be value in buying stocks that the manager is buying more of even if the price of the stock has gone down. That might be a very strong indication that the manager believes in the stock and you will have a oppertunity to buy the stock at a lower price than the manager has been able to do.


Here are some suggestions for superinvestors/funds that you might one to check out and consider to follow and clone:

-Monish Pabrai
-John Rodgers
-Tom Gayner
-Seth Klarman
-Tom Russo
-Jeffrey Ubben
-Chris Hohn
-Bill Ackman
-Francois Badelon
-Brian Bares
-Bruce Berkowitch
-David Einhorn
-Guy Spier
-Warren Buffett
-Glenn Greenberg
-Par Capital management
-Greenhaven associates
-Southernsun asset management
-Wynnefield capital management
-Akre capital management
-SPO-Advisory Corp
-Towle and Company



Following and cloning the ideas of the best value investors with a proven track record can be a very sensible idea. But there can be difficulty in  choosing the managers to follow that will perform well in the future. High returns in the past does not guarantee a high return in the future, even for these investors. Also as any other strategy, it will only work if you keep faithful to the strategy over several years and you have to mentally be prepared to have several years of underperformance. Even the best investors as Warren Buffett and other great value investors have had 2-3 years in a row of underperformance compared to the index. You should also spend time figuring out which managers that has a strategy that you agree with.


Here are some screenshots from webpages that you can use to follow the superinvestors:

ValueAct Holdings: Current stock holdings: From highest percentage of total portfolio to lowestValueact holdingsTop 10 in % of total portfolio and average holding time in top 10: ValueAct Holdings. As you can see from the numbers market with a red circle, ValueAct has more than 90% of the assets in their top 10 stock picks, and the average holding period for the top 10 picks is more than 7 quarters. All good signs that this manager is following a long term value investing strategy.
ValueAct 13F




Why you should diversify

Charlie Munger and Warren Buffett are famous for advocating a concentrated portfolio of stocks. It seems common among many value investors to suggest that a portfolio of 3-5 quality stocks is enough diversification and also beneficial because you then will have the energy, time and concentration to really understand the companies you are buying.

The reasearch I have read says that any additional stocks above 15 has a very small effect on being more diversified and lessen your risk. I think I read that in The Magic Formula book of Joel Greenblatt.


As you see from the graph the biggest effect of diversification happens up until 10 stocks or so. From there on the effect of adding more stocks to your portfolio has less effect.

The opposite of a concentrated portfolio is an index fund. With these you own several hundreds of stocks and your return will be close to the same as the markets return. With an index fund you are basically betting on a country’s long-term economic performance ( if you for example buy the SP 500 index fund). The downside of owning an index fund is that you both own the good stocks and also the crappy stocks in that index. In addition the index fund is usually market cap weighted, which means that more funds is going into stocks with the highest market caps and then probably also to the stocks that is overvalued. The benefit is that you don’t need to make many decisions and ongoing judgements so there is less chance that your irrational behavior is destroying the returns.


Here is what you seldom hear about diversification:


  • A concentrated portfolio can give you the best returns, but can also give you the worst returns. Investing is not about certainties. Nothing is 100% certain in investing. It’s about probabilities and being correct more than you are being wrong over a long time period. Holding only 3-5 stocks makes you very prone to business risk. Can you be really certain that the 3-5 picks that you have made will be performing as you expect? Choosing only 3-5 stocks can be considered overconfidence or it can be brilliance if you really know what you are doing. Investing is a marathon, not a sprint. So if you choose only 3 stocks and 2 of them suffers permanent capital loss, you can be almost wiped out at the beginning of the race. You want to have staying power and be in the game as long as possible and overall do more correct bets than wrong bets. To high concentration can make you prone to unexpected and uncontrollable events that you have little control over.


  • A concentrated portfolio can give you a much higher volatility than a more diversified. Are you emotionally able and willing to handle that volatility?


  • Even if you hold 10-20 stocks are you actually diversified enough? What about the correlation of the stocks in your portfolio. If you are holding 20 stocks and all of them are in the same industry, a downturn in that industry will drag down all of the stocks in your portfolio at the same time.


My advices for diversification:

  • The more experienced and skillful you are as an investor the more concentrated portfolio you can have, and visa versa.
  • For the typical value investor I would recommend 10-15 stocks in your portfolio
  • Diversify across industries and countries. Use the whole world as a hunting place for stocks.
  • Try to select stocks that are not correlated if a downturn happens.
  • If you have no experience with investing or are a beginner, consider buying some kind of value weighted index funds. If you want and if you gain more knowledge you can consider slowly adding more individual stocks in the mix.



The Acquirer’s Multiple: The numbers behind the strategy

You have maybe heard about the Acquirer’s Multiple. It’s a quantitative value strategy based on the multiple EV/operating income. The man behind this strategy is Tobias Carlisle and he also wrote a great book called Deep Value. The strategy is very simple. It’s basically buy stocks with the lowest EV/operating income ratio and rebalance your portfolio once per year. According to his book when doing a backtest using this strategy, the returns have been very impressive. From memory I think it was around 18% annualized. This strategy has worked very well when backtested trough the past decades. EV/Operating income is also considered the cleanest valuation multiple as it include the debt of the company and also its difficult for the management to manipulate operating income.

But will it work in the future?

There is no guaranty of that, and with today screeners and computing power it’s easy to get a list of the lowest EV/Operating income stocks in the whole universe of stocks. That was probably not easy to do in the years up to the year 2k.

Why does the Acquirer’s Multiple work?

I think the reason is of psychology and human nature. The stocks that typically shows up on the screener is usually unpopular, hated and companies where the future is uncertain. This is the reason for the sell off by investors and the low price. And this create a higher chance of mispricing when the emotion regarding a stocks is more towards the extreme. So buying a diversified portfolio of low EV/Operating income stocks will make you be able to take advantage of this mispricing. The key is to be diversified because some of these stocks really deserve the low price. Typically 20-30 stocks is recommended. Another reason is reversion to the mean. Most things are cyclical companies that has financially underperformed for a period tend to have a period of better performance.

A deeper look at the numbers behind the Acquirer’s Multiple

I was curious what numbers characterize the stock except the low EV/Operating income ratio. In the Deep value book the author explained that adding quality components like a high ROE actually decrease the returns instead of adding to the return. So I took all the 30 or something stocks and put it in a stock screener that give me all of the most important fundamentals ratios. I used a free trial of Uncle stock stock screener.

Here is what I found:

Acquirers’s multiple- Excel Spreadsheet

Here are the median numbers for the 31 stocks:

P/E: 9.39
EV/Operating income: 7.3
Dividend Yield: 1.7%
F-Score: 6.38
Z-Score: 3.26
M-Score: -2.44
Current ratio: 1.40
CF Coverage ratio: 65.2%
LT/Debt to equity: 52.9%
FCF/LT-Debt: 21.7%
Quick ratio: 0.87
ROIC 5t avg: 15.5%
ROIC: 16.7%
FCF/Total assets: 5y avg: 4.9%
FCF/Total assets: 6%
CROIC 5y avg: 7.6%
CROIC: 8.0%
ROE 5y avg: 17.3%
ROE: 20.2%
ROA 5y avg: 6.4%
ROA: 8.2%
FCF/sales 5y avg: 3.1%
FCF/sales: 3.5%
Gross margin CAGR: 1.9 %
Held by insiders: 0.5%
Held by institutions: 87.3%
Outstanding share 1 year growth (share buyback): -4.6%
Outstanding shares CAGR: -2.4%
Price YTD change: -13%
Gross margin 5y avg: 22.7%
EBIT margin 5y avg: 7.5%
Net margin 5y avg: 4.8%
Shareholders yield: 7.1%
Damn what a long list.


This is my take on these some of these numbers:

  • Ev/operating income ratio is low but not extremely low.
  • The F, Z, and M-score is all within the limits of what can be considered acceptable. This is an indication for me that there is indeed some addition screening is being done than just spitting out a list of low EV/OI stocks.
  • Low D/E around 0.5 which indicate good financial strength
  • surprisingly high ROIC and ROE. Above 15%. So this shows that these companies have not been crappy companies in the past.
  • The Gross, EBIT, and net margin are quite low.
  • Shareholder Yield very high at 7.1%. This shows that the management are returning back money to the shareholders in form of dividends or share buyback. This also can indicate that the management themself think that their own stock are selling too cheap compared to their intrinsic value



Looking deeper into the numbers we can see that the quality of the stocks that is selected is not as of bad quality as I first imagined. On average they also seem to pass the financial forensic screening of F,Z and M-score. Historically the ROIC and ROE has been quite good. Seems like there is more to it than just a low EV/OI ratio. Also in contrast to what I remember reading in the Deep value book these stocks the high ROIC would decrease the annual return, but still it seems like the stocks also have been screened for a high ROIC.


How to beat the market

Beating the markets returns is difficult. Why? The reasons are many, but some of them are behavioral and others are trading costs.  Let’s start with the first one. To beat the market you need to have a portfolio of stocks that is different from the markets. That means that you can forget buying an index fund if your goal is to beat the market (As the index fund of course gives you the markets return)

So that means that you need a more concentrated portfolio of stocks. I don’t know any specific number but anywhere more than 50 stocks will probably give you a return that is closer to the markets return. So since you need a more consentrated portfolio (preferably 5-20 stocks) you will experience more volatility in the portefolio value. And that can hurt emotionally.

We know from research that the number one reason why the average investors underperform the market is that they buy on top and sell on the bottom. A higher volatility in your portfolio makes it easier to be affected to this behavioral error and do the exactly wrong thing at the wrong time. Apart from the need to handle higher volatility you also need to do a lot of more decisions about buying and selling stocks. This make you prone to get affected by the media, other investors, stocks tips etc.. that will increase the chances that some of the behavioral biases makes you make irrational choices that hurts your returns. One of these is frequent buying and selling stocks that will take away from your annual return in form of trading costs and taxes.

The next one I want to take about is that if you want to beat the market you need an opinion that is different from the market, and you need to be correct about it and the market need to be wrong. If the market is opinion is correct and yours is wrong you will lose money. If your opinion is the same as the markets opinion you will get the markets return. Just think about that for a second. You have to bet against what is the collective knowledge of maybe thousands of investors analysing a stocks future performance. You need have an opinion that is different from them, and you need to make a bet and you need to be right in you predictions. So whats the big deal about this?

Well, you need to be brave to be a contrarian and go against the common and popular opinion about a stock. We humans are social animals and its most comfortable to conform to the opinions of the masses. Also you need to be able to be comfortable looking like an idiot for a long time as the stock price can fall a lot after you buying it and you will still hold it until it reaches it’s intrinsic value. This can take up to many years, and in the meantime you will look stupidly wrong and the market will look correct and that you made a mistake. To handle all of this you need extreme patience, discipline, emotional intelligence, confidence, and at the same time humility.

Also when you know that for the most part the market is efficient (that means correct pricing of stocks) then you can say that you are bold when you bet against the market.

I am not saying that you should give up stock picking, and buy an index fund. Not at all, especially not in this current market conditions where US index funds are very highly priced. What I want is that you think about what it really requires and demand from you to beat the market over a long time period. Few investors manage to beat the market by a large margin over years and decades. Are you one of them?

  • Do you have more knowledge about analysing stocks than the average investors?
  • Are you willing and able to handle the increased volatility that can be experienced with a more concentrated portfolio?
  • Are you more knowledgeable than the seller of the stock that you are buying?
  • Are you able to handle to look wrong for and extended period of time, before you eventually are proven right (assuming you actually made a good bet)
  • Do you have more patience, discipline, emotional intelligence, confidence and humility than the average investor?