If you love reading annual reports and biographies of Buffett and Munger, you are probably trying to improve your business knowledge, to in turn make some extra money, or let's be honest, get rich. If you want to have a portfolio that performs extremely well, that you can be proud of, you should be looking for businesses that have 100 bagger qualities. The hardest part about 100 baggers (making $100 dollars on your investment for each $1 you put in) isn't just identifying them, but actually holding on for the long haul.
Let me explain. Many, many people have had Walmart in their portfolio at one time. But nobody, save the Walton family has held their stock since inception. Why is this and why does it matter? Let's first go over why this matters.
Let's go back in time to the hot stocks of the '60s and '70s. Things included in this index were McDonald's, Coke, Kodak, Polaroid, etc. If you looked at the performance of this index from back then until now, it's not pretty. I won't get into the arguments that Walmart was or wasn't part of the Nifty Fifty, but there is a massive difference of the "index" if Walmart is included vs excluded. With a mere 2% weighting, Walmart takes the Nifty Fifty from a chronic underperformer to a market-shattering behemoth.
Now let's play a thought experiment. Let's say you owned Walmart when it IPO'd. What were the reasons you sold it after its IPO in 1970? Surely the business characteristics looked good. There were a tonne of events that happened between then and now, but if you understood the business, and were a true partner of Sam Walton, there was never much of a reason to sell.
Let's look at KPI's of Walmart since it's been public
1970: 38 stores. 1,500 employees, sales of $44.2 million
1975: 125 stores, 7,500 employees, sales of $340.3 million
1987: 1,198 stores, 200,000 employees, sales of $15.9 billion.
1990's: Walmarts present in all States, begins expansion into Canada, South America, and Europe.
2000: $165 billion in sales
2005: $312 billion in sales
2009: $401.2 billion in sales.
2020: $519.93 billion in sales.
I understand hindsight bias, but the facts speak for themselves. If you had Walmart from 1970 and held it until the mid-'80s, what made you sell? There really isn't much of a reason to have sold at any point when you see how their growth trajectory was in the past. What would some of the reasons be that this hypothetical person would have sold?
From 1970 to 1987 their stores doubled over 5 times in 17 years. Why get out? Sales doubled 8.5 times over the same time period. Again... Why sell? The only valid answer I can think of is that you thought the growth was finished, or you had other reasons (outlined briefly below).
I'd like to introduce you to 2 great Thomas Phelps quotes, one you are probably familiar with if you follow Pabrai:'
"For the individual, or institution really out to make a fortune in the stock market it can be argued that every sale is a confession of error.“
"Never if you can help it take an investment action for a non-investment reason."
Phelps outlines non-investment reasons for selling:
My stock is “too high”
I need the realize capital gains offset realize capital losses for tax purposes.
My stock is not moving. Others are.
I cannot or will not put up more money to meet my margin call.
Taxes will be higher next year.
New management.
New competition.
If you sold for any of the reasons above, you made an error (which literally everyone, save the Walton family did with their Walmart shares throughout the decades). The point here is that a seemingly obvious great business can continue being great, and yet people will make the error of selling when they should be holding.
Your stock is expensive? Conventional wisdom says to sell. A new hotshot company is coming to take their market share? Time to get out. You get the idea. With this framework in mind, the only thing holding you back from getting 100 baggers is yourself.
I think the key to holding on, is understanding your businesses inside out and understanding the moats of the business. If company XYZ has had returned on invested capital of ~10% for the last decade, but they have one bad year (let's say ROIC decreases to 5% due to Covid) is this really a reason to sell? Many short-term-oriented investors would say "yes" I would say absolutely not. If on the other hand, it has 10 years of 10% ROIC, multiple years of decreasing ROIC, decreasing margins, and decreasing income, then you might be ready to hit the sell button.
What the list shows us above is that even if our stock is expensive, there is new competition, new management, and other macro factors, these aren't necessarily reasons to sell! If you understand the underlying economics of a company and have some insights the market doesn't, then hold on for as long as possible. Don't use the stock price as a reason to get out. Only exit when the fundamentals of the company begin to crumble. If you don't understand what could happen to destroy your company, you don't understand it well enough.