100 to 1 in the Stock Market

1. The Path to Wealth: Buy Right and Hold On

Fortunes are made by buying right and holding on.

The fundamental truth. The most profound lesson in investing is often the simplest: identify fundamentally strong companies and maintain your ownership for the long haul. This strategy, though seemingly straightforward, counters the pervasive urge to chase fleeting gains or react to every market fluctuation. It emphasizes that true wealth accumulation stems from participating in the sustained growth of successful businesses, rather than attempting to outwit the market through frequent trading.

Avoid common pitfalls. Many investors fall prey to the "dog in Aesop's fable" syndrome, losing a good stock in hand by snapping at a seemingly better reflection. The author highlights that every sale, especially of a winning stock, is often a confession of error, incurring capital gains taxes and missing out on vastly larger opportunities. The goal is not to make a few points quickly, but to allow compounding growth to work its magic over decades.

The "never sell anything" philosophy. The book shares anecdotes of individuals who amassed immense wealth by adhering to a strict "never sell anything" policy, such as Mr. Blank, a client of Norris Darrell, or Paul Garrett with his Xerox and Teleprompter holdings. These stories underscore the power of conviction and patience, demonstrating that the biggest returns come from letting winners run, rather than cashing in small profits.

2. Opportunity Knocks Constantly, Not Just Once

What nonsense it is to say that Opportunity knocks but once. That beautiful lady has been banging incessantly on Everyman’s door for more than a quarter century.

Abundant millionaire-makers. Contrary to popular belief, opportunities to turn a modest investment into a fortune have been consistently available, not just in the depths of the 1930s depression. The book meticulously lists over 365 different securities that could have transformed a $10,000 investment into $1 million or more by 1971, with entry points spanning 32 different years, as recently as 1967. These weren't obscure penny stocks; many were well-known companies, some even in the Dow-Jones Industrial Average.

Beyond the obvious. The author illustrates that these opportunities weren't limited to the lowest prices or the most obvious "growth" stories. Even stocks like Eastman Kodak, Goodyear, Sears, Roebuck, Philip Morris, and Pitney Bowes, available in the early 1930s, delivered hundredfold returns despite varying initial price-earnings ratios or relative market performance. This suggests that the underlying business strength, rather than immediate market sentiment, was the ultimate driver.

Accessible information. Crucially, all listed "millionaire-maker" stocks were quoted in widely available financial publications like The Wall Street Journal, Moody’s manuals, or the Commercial and Financial Chronicle at the time they were selling for 1% or less of their 1971 value. This debunks the myth that such opportunities require "inside information" or exclusive access, emphasizing that diligent research and a long-term perspective were the real keys.

3. Patience and Tenacity Outperform Quick Profits

The shorter the time a stock has been held before it is sold, the more palpable the error in buying it—go-go fund managers to the contrary notwithstanding.

The elephant hunter's lesson. The author draws an analogy from hunting elephants: "When looking for the biggest game, be not tempted to shoot at anything small." This means investors seeking truly massive returns should resist the urge to trade frequently for small gains. Short-term trading, while seemingly active, often leads to missed opportunities for exponential growth and generates significant tax liabilities and brokerage commissions.

Holding through adversity. Many 100-to-1 stocks, like Occidental Petroleum or Globe & Rutgers Fire Insurance, experienced severe price declines or prolonged periods of underperformance before their spectacular rises. An investor in Occidental Petroleum, for instance, would have seen a $10,000 investment shrink to $1,600 before eventually soaring to over $3 million. Such journeys demand extraordinary patience and conviction, ignoring the "sell" recommendations that inevitably arise during lean years.

The cost of impatience. Selling too soon is "frightfully expensive." The book highlights examples like Computing-Tabulating-Recording (IBM) shares sold for $21,700 in 1921 that would be worth over $150 million by 1971. This illustrates that the bulk of a stock's appreciation often occurs in its later stages of growth, and premature selling forfeits the compounding effect. The ability to "sit tight" through market noise and temporary setbacks is a rare but invaluable trait for wealth creation.

4. Focus on Stock Selection, Not Market Timing

To clinch the argument, it is readily demonstrable that far more money can be made by good stock selection than by good stock market timing.

The futility of timing. The author argues that even if one could perfectly forecast market movements, the temptation to trade based on such forecasts often leads to missing much larger, long-term gains. Market timing is inherently difficult because bull market highs are made when optimism is highest, and bear market lows occur when pessimism is overwhelming, making it nearly impossible to persuade investors to act contrary to mass psychology.

Bear market blindness. Predicting a bear market, as the author did in 1937, can be correct but still less profitable than focusing on individual stock opportunities. During the 1937-1945 bear market, numerous stocks like Sharp & Dohme (Merck), Beech Aircraft, and Carnation still offered 100-to-1 opportunities. Over-emphasis on market timing can blind investors to these individual company strengths.

The "triumphs of lethargy." The book champions the idea that "triumphs of lethargy" – simply holding onto well-chosen stocks – often yield superior results compared to active trading. Examples like Xerox, where early investors who "never sell anything" reaped fantastic harvests, underscore that foresight is less important than tenacity. The key is to concentrate on finding the right stock to buy, rather than constantly trying to predict the market's next move.

5. Understand Earning Power, Not Just Reported Earnings

What is the difference between earnings and earning power?

Beyond the numbers. "Earnings are simply reported profits no matter how obtained," while "Earning power is competitive strength." This crucial distinction highlights that not all reported earnings are created equal. Temporary surges in demand, accounting changes, or general economic booms can inflate earnings without reflecting a fundamental improvement in a company's underlying competitive strength.

The quality of earnings. Investors must scrutinize the quality of earnings, looking beyond the headline figures. Factors that can distort reported earnings include:

• Lease financing: Undisclosed liabilities that can mask true financial leverage.
• Plowed-back earnings: Retained profits that fail to generate future earning power, akin to depreciation.
• Research & Development: Companies investing in R&D, even if unproductive short-term, have greater future potential than those spending nothing.
• Inventory & Receivables: Aggressive sales tactics or inventory buildup can temporarily boost sales but signal underlying weakness.
• Environmental & Labor Practices: Cutting corners on social responsibility can lead to future liabilities that erode profits.

Focus on sustainable strength. True earning power is reflected in consistent, above-average rates of return on invested capital, strong profit margins, and sustained sales growth, especially in expanding markets. These indicators reveal a company's ability to generate profits reliably over time, regardless of short-term market fads or accounting maneuvers. Ignoring these qualitative aspects in favor of simple price-earnings ratios can be a "deadly dangerous" mistake.

6. Beware of Egonomics and Short-Sighted Decisions

Egonomics is the art of judging every issue, making each decision, on the basis of what it will do for your ego.

Ego vs. economics. Many investment decisions, both by corporate managers and individual investors, are driven by ego rather than sound economic principles. Corporate egonomists prioritize making their company bigger (e.g., through unprofitable acquisitions or excessive capital expenditures) over making it more profitable, often at the expense of shareholders. This misdirection of capital sabotages the economy and erodes shareholder value.

Signs of egonomics in management:

• Low return on invested capital: Persistently plowing money into ventures with poor returns.
• Focus on size over profitability: Prioritizing market share or revenue growth above all else.
• Lavish corporate headquarters: Spending on prestige rather than core business.
• One-man show: A CEO who hogs the spotlight, leading to talent drain and lack of succession planning.

Investor ego traps. Individual investors also fall prey to egonomics by:

• Unwillingness to accept outside ideas: Preferring to lose money on their own ideas than profit from others'.
• Chasing "hot" stocks: Buying into popular narratives rather than fundamental value.
• Over-trading: The thrill of activity and "making a fast buck" often overshadows long-term wealth creation.

The cost of pride. "Monuments Rarely Pay Dividends" is a timeless warning against businesses that grow "stately" and complacent, losing their competitive edge. Wise investors quietly exit such companies, recognizing that pride and tradition can stifle innovation and lead to declining returns.

7. Seek Companies with High "Gates" and Real Growth

No business is so good that it cannot be spoiled if too many get into it. It is vitally important that the high rate of return be protected by a “gate” making entry into the business difficult if not impossible.

Identifying true growth. The most reliable path to 100-to-1 returns lies in companies that consistently reinvest earnings at high rates of return on invested capital. However, this alone is insufficient. The key is to find businesses whose high returns are protected by strong "gates" against competition, ensuring their profitability isn't easily eroded.

Characteristics of strong "gates":

• Patents and intellectual property: Legal protection for unique products or processes.
• Incessant innovation: A culture of superior research and development (e.g., Xerox).
• Unique raw material sources: Exclusive access to essential resources (e.g., natural resource discoveries).
• Established brand names: Strong consumer loyalty and recognition (e.g., Tampax, Avon Products).
• High switching costs: Making it difficult or expensive for customers to switch to competitors.

Where to hunt for winners: The author suggests looking in areas of significant societal change and innovation:

• New inventions: Automobiles, airplanes, television, birth control pills, lasers.
• Efficiency improvements: Computers, earth-moving machinery, disposable items, copiers.
• Solving major problems: Pollution abatement, new energy sources, recycling, advanced transportation.

The power of compounding. A company earning 15% on invested capital, reinvesting all earnings, can double its book value in five years and quadruple it in ten. This arithmetic, combined with strong competitive advantages, creates the foundation for exponential stock appreciation.

8. Inflation and Interest Rates Shape Investment Climate

Inflation is cheating. It results solely from efforts to get something for nothing.

The nature of money. The value of money is determined by inherent worth, taxes, and fiat (government decree). When governments abandon inherent value and fail to balance spending with taxes, they resort to printing money, leading to inflation. This "crudest tax" robs Peter to pay Paul, increasing demand relative to supply and driving up prices.

Inflation's double-edged sword. While inflation can initially boost stock prices by making existing assets more valuable and encouraging borrowing, prolonged and high inflation eventually becomes detrimental. It distorts economic signals, leads to wage-price spirals, and often results in government controls that stifle corporate profits. The author notes that after a certain point, inflation "clouds rather than brightens prospects for corporate profits."

Interest rates as a mirror. Interest rates are the "price of time" and directly reflect inflation expectations. Lenders demand compensation for the anticipated decline in purchasing power, while borrowers are willing to pay more to acquire assets that will appreciate in nominal terms. Attempts by governments to artificially suppress interest rates during inflationary periods are "as futile as trying to drown a fire with gasoline."

Bonds vs. stocks in inflation. In inflationary environments, high-grade bonds become less attractive as their fixed payments lose purchasing power. However, if inflation can be brought under control, or if interest rates over-discount future inflation, bonds can offer capital gains. Stocks, as ownership stakes in real assets, generally offer better protection against inflation, but only if their earnings and dividends can keep pace or exceed the rate of inflation.

9. Ethical Management is a Long-Term Profit Driver

He profits most who serves best. In the long run that is just as true of corporations as of individuals.

Integrity as a competitive advantage. The author posits that ethical conduct and a genuine desire to serve human needs are not just moral imperatives but powerful long-term profit drivers. Companies and leaders driven by zeal to solve problems, rather than solely to make money, often find profits as a "serendipity dividend." Conversely, "chiselers are not so much selfish as myopic, not so much greedy as stupid."

The compounding of character. Just as cells in a body are replaced by like cells, corporations tend to hire and promote "their kind of people." Morally derelict management can infect an organization, making it unwise to expect a quick turnaround. Conversely, a management with high integrity, like B. Brewster Jennings of Mobil Oil, sets a standard that outlives them, fostering a strong, ethical culture.

Protection against deception. In a world where accounting practices can be manipulated and information distorted, investing in companies with unquestionable integrity provides a crucial safeguard. The author advises running "as fast as possible at the first hint of sharp practice," as no laws or regulations can fully protect investors from those determined to defraud. With over 50,000 stocks available, it is "unnecessary but downright stupid to buy into a company run by men of doubtful integrity."

10. Self-Awareness is Key to Investment Success

Do I know the difference between the courage of conviction and mulish balking at admitting and correcting errors?

Know thyself. Before embarking on a "do it yourself" investment journey, individuals must honestly assess their own qualifications, temperament, and resources. Success requires more than just intelligence; it demands specific education, training, industry contacts, and a willingness to undertake extensive research, as exemplified by Paul Garrett's meticulous process in finding Xerox.

Emotional fortitude. The path to 100-to-1 returns is rarely smooth, often punctuated by severe market declines that test an investor's resolve. The author asks, "Am I strong enough, financially and emotionally, to risk a major investment... Or will I lose faith in my judgment the first time the market goes down...?" The ability to "walk alone when the going is rough" and resist the urge to sell during downturns is paramount.

The value of professional guidance. If one cannot confidently answer these questions in the affirmative, seeking professional guidance is prudent. A good financial advisor should be judged not by short-term "performance" or frequent trading, but by long-term results, the "advantage-disadvantage" of their recommendations, and a low ratio of brokerage commissions to net capital gain. The goal is to find a partner who helps you "buy right and hold on," rather than one who encourages unproductive activity.