SQGLP: the secret sauce of 100 Baggers

Hey friends — Joe here.

💡 One Idea Worth Compounding lands every Tuesday. One framework, one book, one conversation — explained plainly enough to act on.

Nothing here is advice. Just how I think about it.

I spent part of last week with Christopher Mayer's 100 Baggers — a book that intrigued me to start the quest for high quality long term compounders.

This books argues that 100x your return by investing into high quality businesses not impossible. In fact, there are plenty of examples to prove that this is achievable in the stock market.

What made the book practical is the framework that Christopher Mayer distilled after interviewing plenty of successful investors and researching into the 100 baggers in history.

Mayer calls it SQGLP. Five conditions that made up the secret sauce of 100 baggers:

S — Size is small. Under roughly $300 million. The arithmetic is the whole argument: a company can grow ten or twenty times over and still be a small company. It’s not to say that AAPL can no longer be a 100 bagger, but at the 4.87 trillion valuation now, AAPL will need to get to 487 trillion valuation to be a 100 bagger for shareholders now. Much more unlikely compared to a company growing from $300M to $30B in market cap.

Q — Quality is high, in both the business and the people running it. Both, not either. A good business with a careless capital allocator leaks value quietly for years.

G — Growth in earnings is high. And the shape matters more than the rate — a staircase that keeps stepping up, not one spectacular year followed by a plateau.

L — Longevity of the Q and the G. The moat question - can the business keep producing high growth and reinvest at a high return on capital for a LONG time? Moats could be a brand people ask for, switching costs that hurt, a network effect, doing it cheaper than anyone, or simply being the biggest.

P — Price / Valution is favourable. Pay for a relatively lower price/earning multiples. As the business grow and keep beating earning estimates, the multiple expansion helps to deliver the other growth engine to get to 100x return faster. Overpaying with high multiples cripples the second engine for your returns.

Now look at the order again.

The line I didn't expect

Mayer's own words, and they're softer than I'd normally tolerate: there is no amount of security analysis that is going to tell you a stock can be a hundred-bagger. Analysis weeds out the duds. It doesn't find you the winner. That part takes imagination and optimism.

What I'm doing about it

The book offers a practical framework to re-evaluate my portfolio.

The biggest realisation is that I currently don't own a microcaps and I'm not going to start buying sub-$300M companies because of the book.

However, it offers a new thinking framework to ask myself whether the company has the potential to grow 100x bigger. e.g. I may not be specifically looking for companies at the 300M market cap, but a company with 1B market cap to me has a good potential to grow to 100B if the other conditions are met.

Which of the five secrete ingredients do you think is the most revealing? For me, current size of the company wasn’t something I pay too much attention to — almost nothing I hold is small. Hit reply and tell me. I read every one, and these answers become future issues.

Keep growing!

Joe