Mohnish Pabrai’s “10 to 100 Baggers”
A framework for multi-bagger investing
Note: In our quest to add to our growing latticework of mental models and frameworks, we plan to do individual write-ups on each of the 5 “paths” to multi-baggers that Mohnish has identified. The below is a summary of the framework. At the bottom of this article we have identified a list of companies that fit within this framework.
Background
Mohnish Pabrai is a successful investor, hedge fund manager, and philanthropist who compounded the value of his investment partnership, Pabrai Investment Funds, at an annualized return of 15.5% from its inception in 1999 until 2018. This is ~2x the annual rate of return of the S&P 500 over that same period.
In December 2020, Mohnish hosted a lecture with students at Peking University (Guanghua School of Management) and presented an insightful framework on how to identify multi-bagger stocks. This multi-bagger approach will be the first framework that we add to the Vault.
The Path to Multi-Baggers
Mohnish claims that most multi-bagger stocks can be bucketed into one or more of the following 5 categories:
Focused Mousetraps - Narrowly focused players with long runways and large total addressable markets (TAM).
Great Capital Allocators - These companies are led by fantastic management teams who have a track record of efficiently deploying capital to generate high returns on invested capital over the long term.
Uber Cannibals - Companies with a focus on share buybacks. As Mohnish puts it, “the pie may not grow, but your share of it will.”
Deeply Undervalued Players / Public Leveraged Buy-Outs (LBOs) - Turnaround businesses trading at deep bargain prices.
Spawners - Companies that continually “spawn” other businesses that may or may not be related to their core competencies.
The Framework
Multi-baggers can, more often than not, be categorized under one of the 5 paths outlined above. The difficulty is in identifying which one, why, and recognizing how that characteristic can allow the business to exceed over the long term.
One important implication of the multi-bagger approach is that it lends itself to having a concentrated portfolio of one’s top ~10 ideas. The winners will make up for the duds.
With this framework, it is essential to keep in mind two quotes by Peter Lynch and Charlie Munger:
Selling your winners and holding your losers is like cutting the flowers and watering the weeds. - Peter Lynch, One Up on Wall Street
“The first rule of compounding: never interrupt it unnecessarily.” - Charlie Munger
If you find a winner, you want to let it run and allow it to compound your investment over time over the long term.
The $50 Billion Rule
Of the over 3,700 IPOs in the US over the last 20 years (as of February 2021), only 9 businesses have exceeded a $100 billion market capitalization. Based on this, Mohnish asserts that one should assume that a $50 billion market capitalization is the upper limit of what any business you invest in will achieve. So, if you want a 10x on your investment, you should only look for businesses below a $5 billion market capitalization. Similarly, if you want a 100x, you should only look for businesses below a $500 million market capitalization.
The Rule of 72
When thinking about returns, a useful mental shortcut is the “Rule of 72.” To determine how long it will take for an investment to double at a given annualized rate of return, take 72 and divide it by the rate of return.
For example, assuming a 15% annualized rate of return on your investment, it would take approximately 72/15 = 4.8 years to double your money. A 15% annualized rate of return for 10 years is a ~4x on your money; for 20 years, it is a ~16x. This assumes no multiple expansion.
An important nuance to keep in mind is that to 10x your money in 10 years, your investments need to compound at an annualized rate of ~26%. To 100x your money in 20 years, you need to compound at ~26% per year.
You might notice a pattern there: 26%. This is the magic number. By following the multi-bagger approach, you are ideally seeking out investments that might compound at a 26% annualized rate.
Obviously, this is much easier said than done, but the crux of the multi-bagger framework is that you are not only looking for short / medium-term mis-pricing. Rather, you are looking for businesses that are mis-priced and are likely to compound their intrinsic value at a high annualized rate over the long term. In other words, you are looking for quality companies with long runways and large reinvestment opportunities trading at a discount.
The List
Outlined below is a list of companies that we have identified and believe can be categorized under one of the 5 “paths” (either currently or in the past). This list is for reference and is based on our opinion only, so please conduct your own due diligence as well. We will be continually adding to this list over time (there may be some overlap across categories).
Focused Mousetraps
Costco, McDonald’s, Chipotle, Ferrari, Philip Morris, Coca-Cola, Brown Forman, Nike, Church & Dwight, Old Dominion Freight Line, Domino’s Pizza, Pool Corporation, Rollins…
Great Capital Allocators
Berkshire Hathaway (Warren Buffett/Charlie Munger), Constellation Software (Mark Leonard), Roper Technologies (Brian Jellison), Danaher, Markel Corporation, Reysas Logistics…
Uber Cannibals
NVR, Autozone, Murphy USA, Discover Financial Services, Assured Guaranty, Jack in the Box, Primerica, Navient…
Deeply Undervalued Players / Public LBOs
Reysas Logistics, Rain Industries, Fiat Chrysler…
Spawners
Amazon, Alphabet, Alibaba, Apple, Berkshire Hathaway, Tencent, Baidu, Starbucks, Meta, Restaurant Brands International, Brookfield Corporation, TAV Airports, Microsoft, Spotify…