How To Find Your

Baggers
Thoughts Learned From Great Investors
Edited by Nikki Yu (Faceless Trader)
Feb 14, 2015

I Want To Be A Billionaire? So Freaking Bad?

Be a history buff. Study every billionaire you want to ever become.
If you want to be a great trader or investor, you have to study the best in the
field. Consult the following books : Jack Schwagers Market Wizards and
Hedge Fund Market Wizards as a starting point. Steven Drobnys Inside The
House of Money as well as Ken Fishers 100 Minds that Made the Markets.

Bull or bear market, great and profitable ideas continue to get funded by
Wall Street.

Highly Recommended References On Personal

Investing Journey

Andy Kessler, Running Money; Eat People

William O Neill, How to Make Money in Stocks

Michael Moe, Finding the Next Starbucks

Peter Lynch, One Up On Wall Street
Peter Thiel, Zero to One

 Whos Andy Kessler? He turned a $10M dollar fund into $1Bil dollars in 5
years. Technology boom yes? But how?

Whos William O Neill? Know Investors Business Daily? CANSLIM?

Enough said.

Whos Michael Moe? Know about Megatrend investing? Hes the guy who
made money investing and adding winners on Starbucks.

Whos Peter Lynch? Legendary investor in Fidelity Fund. Hes the one
responsible for the now popular term bagger when he means 100% on gains
in stocks.

Whos Peter Thiel? Legendary Venture Capitalist, Tech Entrepreneur. PayPal

roots and beyond.

Knowledge Scales, Manage Risks

Knowledge and the usefulness of knowledge scales with almost no
bounds. - Andy Kessler

There is no such thing as no risk -only managed risk. - N. Yu

 Baggers are Long Run Winners. Peter Lynch, Fidelitys legendary fund
manager espoused the idea that ordinary investors can find stocks that move
500% or 1000% by themselves. I wish it were really true and easy. Is it?
How could an ordinary investor find five baggers or ten baggers?

Example: Starbucks, Apple, Tencent, Universal Robina Corp, Jollibee Foods

Corp, International Container Terminals, Microsoft, Google, Intel, Cisco

New Winners? Fill in the blanks

Is There Such A Thing as Long Run Value?

Investing is not being a slave to the last stock tick.
Companies announce earnings every quarter. High growth companies are
highly vulnerable to bad news, and even hints of problems can create a
shoot first ask questions later response. Traders are news sensitive.
Investing has become too short-term these days.

Whats Investing? Seeing The Future

Expectations change everyday. Someone sours on a story or thinks a new

competitor will eat their lunch, and a stock goes down. Or someone is at a cocktail
party over the weekend and a listed companys salesman tells him that hes under
quota and on Monday, the stock price goes down. Its next to impossible to catch
these moves, but they more often tell you absolutely nothing about the long-run
fundamentals of the company. Some portfolio manager is sick of seeing a stock on
his screen, blows it out, so its down three bucks on no news. Happens all the time.
It doesnt mean the quarter is bad.
The best investors dont get persuaded by stock blips or charts. Its about
staying ahead of the curve anticipating changes in sentiment. Youve got
to anticipate what newspaper headlines will say next.

Investing is not a walk in the park

Wealth comes not just from taking risks but from constantly taking risks.
You can be a long term investor, but you constantly have to adjust your sights to
the next big thing.

We may be in the midst of a long cycle like the British 100 year old industrial boom
but that doesnt mean you can buy and hold and be on the golf course by noon.

Wealth really is a never-ending process. So is running money. You cannot just

walk away and ask about the meaning of life. It is my life and all consuming.

Evolution is simply Constantly Changing

Innovation is not a big breakthrough every time. Innovation is a constant
thing but if you dont have an innovative company, coming to work everyday
- you dont have a company, youre getting ready to die at the vine. - Jack
Welch

What is your edge?

Invest in companies with great long-term prospects?
Jim Burckhardt: I check all the stats, economic indicators, earnings
numbers, all that garbage. Everyone has them, so they dont provide much
of an edge. My edge is trying to know the headlines before they
appear. There are a bunch of long term trends and I pick a few I really
believe in and then extend them far enough out that I can write next years
headlines today. Im not always right but I usually get pretty close. It makes
all the noise go away.

Changes. Thats what you can make money on.

Change is the key. Things that stay constant or grow too slowly are way
too dull to invest in. The economy grows 3%, 4%. Bonds yield 5%. Ho
Hum. Why bother? Change, Change, Change. Lots of it. All the time!
Thats what hedge funds thrive on, something you can make money on.
- Andy Kessler, Running Money

You Have to Invest Early in Trends

In 1792, when the gin was invented , no more than 150,000 pounds of
American cotton made its way to England; eight years later it was 17
million pounds. By 1850, 700 million pounds of cotton were exported to
England. To put this in perspective, in 2003, 5.6 billion pounds of cotton
were exported from the US. Thats a factor of 5000 growth in the first 58
years. Then cotton grew by a factor of 8 for the next 153 years or a puny
compound growth rate of 0. (insert 100 zeros) 1%?. You have to be early on
these trends. Thats where the money is.

Industrialization

The world was changed by electricity at the turn of the last century or by radio in

the 1920s or television in the 1950s, or maybe automobiles or washing machines or

refrigeration or air conditioning. Industry supplied the product more and more
cheaply, and an entire consumer economy was built around these cheap,
revolutionary products.
Entire economies evolved to supply this stuff. Japan with consumer electronics
and then cars, Taiwan or China with all sorts of manufacturing and assembly. These
are all remakes of the Industrial Revolution movie.
Industrialization was not some master plan to remove workers from their century
old tasks. Instead, it was a complete re-engineering of life based on the ability to
provide daily staples at much lower costs. Getting everyone together in one steam
engine driven factory produced higher quality and lower cost textiles than anything
done at home by old spinsters. As long as England could keep prices for cloth
down, they could create new markets and keep competition away. Growth was
created by and protected by its own declining price elasticity. Now, thats
something we want to invest in.

Railroad Mania
By the 1840s, a railroad mania was raging, stocks selling on multiples of passenger
miles, a precursor for multiples of page views that Yahoo stock would trade on 150
years later. An inventor named Charles Babbage complained that the railroad
mania withdrew from other pursuits the most intellectual and skillful draftsmen
and sought to invent a machine that might replace them and make Yahoo possible.
Charles Dickens marveled at railroad wealth. Investors made money, investors lost
money, but in the best and worst of times, the railroads got built and people and
goods were shuffled about more and more cheaply. The Industrial Revolution hit
its stride.

Suez Canal Era

The next barrier to be broken was the distance to India and the Far East.
After 10 years of construction, the Suez Canal opened in 1869.
Transportation costs dropped yet again, by a factor of three or more, and as
importantly, distance and time became deterministic. The trip from Malaya
to England to deliver tin took exactly three months, which was the same time
it took for copper to arrive from Chile. This allowed commodity exchanges
like the LME to create three month forward contracts.

What has Worked in the past?

What has worked in the past were not quickie trades but decade long
booms.

The Industrial Revolution, Railroads, Electricity, Oil, Cars, Communication,

The Silicon Valley

Railroads have United States literally (Cornelius Vanderbilt)

Rockefeller filled the days and nights with light (through Standard Oil
refining businesses)

Megatrend: Technology Revolution

Computers werent just for boring accounting functions. They really could
augment the human race, increase efficiency and productivity by replacing
costly repetitive human functions. That was real scale.

Focus on the Margin

Some companies make 35% profit margins on a good day.

Others make 55% profit margins on a bad day.

The stock market teaches you the hard way. Its all in the margin.
Some sell patent-protected pills that cost pennies for $10 a dose.
Hollywood sells copyright DVD disks for $19.99 that costs a buck at most to
manufacture.

Nascent Industry: Seeds of a Boom

The most obvious metaphor and parallel between the Industrial revolution and the

digital revolution are the steam engine and the microprocessor. Both are worthless
as standalones but when attached to the same process, each lowered the processs
cost and increased its performance. Steam engines were attached to bellows in iron
foundries and to spinning frames and looms in textile mills, replacing horses and
water. Eventually, machines and factories were designed knowing steam engines
would power them.

Microprocessors initially attached to calculators but over time to new products like

personal computers designed with microprocessors at its core. Both never stopped
improving.

Effects of a Microprocessor?
TV Typewriter = Personal Computer.
The cool thing about a computer on a chip is you can start a computer company
without knowing much about computers. Steve Jobs and Steve Wozniak created Apple
Computer I without knowing that much. Wozniak wrote software to get data on and
off a floppy disk drive, which no one else had, and their Apple 1 had became a hit.
IBM knew lots about how to milk big bucks out of big computers, but nothing about
microprocessors. So a stealth group in Florida contracted out the work, creating a
Frankenstein-like IBM PC in 1981, using an Intel microprocessor, Microsoft software
and a Western Digital disk controller. Design and manufacture were now separated in
the computer business too.

Watch Out for Transformative Forces

Disruptive Innovation
Technology
Megatrends
These force companies to reverse fortunes.

Characteristics of Baggers
As long as the fundamentals of the cycle still scale
What would double or grow exponentially every year Monster
Markets

Management keeps improving

Strong Edge

Running Money Versus Running A Company

Running a company is like driving a tank down the street except the tank
has no windshield, just a rearview mirror, and there are five or six managers
pushing pedals and pulling levers and turning dials and adjusting settings
almost by trial and error, trying to drive as fast as they can and keep the tank
going straight, and all of a sudden a giant tree drops into the middle of the
street and the team has to somehow steer around it without spilling their
coffee.

And I guess you have to make sure managers are up to that task.

You Do Have To Rely on Management

But you do have to rely on management. When you own a million shares
of a company, youre stuck with it. You cant get out overnight, so you
have to trust management to run a smooth ship, no surprises. This is
easier said than done. We werent the type of fund that lived and died by
quarterly profit announcements by companies. We never bought a stock
because we thought theyd beat estimates by a penny, although thats the only
thing plenty of other hedge funds did. Earnings were signposts along the
way.

Megatrends

Consumer Economy
Cheap Communication

Coffee Consumption
Innovation. Zero to One Investments.
Globalization. 1 to N

Zero to One
Horizontal or extensive progress means copying things that work going from 1 to n
Horizontal progress is globalization. Taking things that work somewhere and making them
work everywhere. The Chinese have been straightforwardly copying everything thats
worked in the developed world.

Vertical progress is technology. Properly understood, any new and better way of doing
things is technology.

In a world of scarce resources, globalization without new technology is unsustainable. New

technology has never been an automatic feature of history. Our ancestors lived in static
zero-sum societies where success meant seizing things from others.

Contrarian Truths.
If you can identify a delusional popular belief, you can find what lies hidden
behind it. The contrarian Truth.

Madness is rare in individuals but in groups, parties, nations and ages, it is the
rule. - Neitszche

Its hard to blame people for dancing when the music is playing; irrationality
is rational given that appending .com to your name could double your
value overnight. - Mania. In this kind of environment, acting sanely
becomes eccentric.

THINK FOR YOURSELF

Everyone learned to treat the future as fundamentally indefinite after market
crashes. They dismissed as an extremist anyone with big plans measured in
years instead of quarters. Globalization replaced technology as the hope for
the future. --- result? BRICS boom then BRICS bubble.

The most contrarian thing of all is not to oppose the crowd but to
think for yourself.

You Need an Edge

Because information is distributed in milliseconds, there is no significant time advantage

anymore. You have to be ahead of news. You have to look not at change but at how fast
change is changing. Your old calculus teacher would remind you that the first derivative is
speed, the second derivative is acceleration.

There are so many barriers to change. Government regulations? Who cares- barriers are
barriers. As long as you find a barrier to invest against, you can make money when that
barrier breaks and change accelerates.

Most hedge fund guys take the other side of a trade when they know something no one else
does i.e.- investing because others dont know. Thats their edge.

When you think long-term, the edge is really investing because others cant know.
I suppose others could know if they thought hard enough, but, oddly, no one does. Its not

the actual declining cost of power or transportation, chips or bandwidth, etc. thats hard to
figured out. Its the change they enable. These concepts are hard to grasp. Its the
nasty second derivative stuff. Its not the amount of change, but the change in the rate
of change.

Find What Barriers Have Been Broken

Investing is inexact. You cannot possibly get companies and timing right.
But if you can find technology that scales and imagine the barriers
that might burst, all you really need to do is be in the same
neighborhood. But when it works, sit back, count slowly so you know
when to jump off and enjoy the free fall.

Trading Strategies
Patient Accumulators / Scrape and Claw Strategy
I dont understand. Why is it so hard to buy this stock?

When you try to buy small cap stocks, they trade by appointment. Lets say you
got 1,500 shares. You need 20,000 shares or maybe 50,000 shares. The
moment you bid up, youre scaring everyone off and theyll see the price head
up and figure theres a big buyer so theyll stop selling and waiting for it to go
even higher. You gotta have a poker face and just scrape and claw at this thing.

The Stock Market

The stock market function is an important one, it is a great mechanism to :
Provide expansion capital for businesses

Agree on a price for a business and

Transfer shares from owners to others that may have a completely different risk
profile or time horizon

Being Competent
Inside the Industries You Invest In
From the side of the highway, you cannot tell which cars are going at
constant speed and which are accelerating. But from inside the car, you can
feel the seat press against you when you gun it. Thats the first lesson to
do well, you have got to be in the car, not on the sidelines watching.

In reality, second derivative stuff is quite simple. If you can figure out what
is getting cheaper, year by year, you can start to imagine the change in status
quo into the future. And, I think, you only have to be close.
- Andy Kessler, Running Money

Always Think in Terms of Megatrends

Economies of Scale
Elasticity When prices go down, it stimulates new demand and you set
yourself a growth business.

Keep figuring out what makes Silicon Valley work. Keep figuring out what
works in Wall Street. Keep figuring out.

Find Monster Markets to Have Momentum

Monster Stocks
$100 Mil industries are small cap markets
Being the leader in a small market doesnt mean much. 100% of 0 is 0 versus 0.1% of $100Bil or
$100M

What valuable company is nobody building? Creating value is not enough. You need to capture
some of the value you create. Perfect competition versus Monopoly.

Monopoly the kind of market thats so good at what it does, no other firm can offer a close
substitute. If you want to create and capture lasting value, dont build an undifferentiated
commodity business.

Invest in Monopolies. Monopolies lie to protect themselves. They know that bragging about
their monopolies invites being audited, scrutinized and attacked. Conversely, those who are
nobodies exaggerate their non-existent domination.

Equity Markets ARENT ZERO SUM GAMES

Profits come out of customers wallets and monopolies deserve their bad reputation
of taking money from everyone else but only in a world where nothing changes. In
a static world, a monopolist just collects rent. If you corner the market for
something, you can jack up the price. Others will have no choice but to buy from
you. Relative values for properties are fixed for all time so you have no choice but
to buy them up.

But the real world is dynamic. Its possible to invent new and better things. New
industries. Creative monopolists give customers more choices by adding entirely
new categories of abundance to the world. Creative monopolies are powerful
engines for societies to progress and move forward. Example Apple.

 If the tendency of monopoly businesses were to hold back progress, they

would be dangerous and we would be right to oppose them. But the history
of progress is a history of better monopoly businesses replacing incumbents.

Ford and GM versus Toyotas and Hondas versus Teslas?

Perfect Competition is a relic.

Perfect competition is not desirable. Equilibrium means stasis. Stasis means
death.

CHANGE IS LIFE. CHANGE IS KEY. CHANGE IS PROFITABLE.

Bill Kaye, Andy Kessler Globalization (1-N)

Bill Kaye runs an Asian investment fund and seems to have it easy. Ive been depressed ever

since I talked with him. He had it all figured out. He said that I had the difficult job of figuring
out the future, and that in Asia, it was just the Industrial revolution movie playing over and over
again. You just have to find countries and companies in different stages of development and
place them in the Industrial Revolution timeline and figure out whether to invest. So, why do I
always pick the hard stuff to do, instead of just sitting in some marble building and eating Peking
duck all day, picking stocks from a script that was already played out in an old movie.

No, youve got the easy job. Youre looking for the next Industrial Revolution.
I dont understand.
You will. Go find that movie and play it. Find the parts you need, and then make your own.
Then you will tell me how you will invest.

I thought I stopped doing homework when I graduated college.

Surely you have figured out you never graduate.

Investing and Trading Strategies

Conviction. This is the real secret to investing that nobody knows. Find
something you know is right and that you believe in. Fire in the belly.

Find the Next Industrial Revolution

Trading Strategies: Buying the Vomits.

A cheap stock is not the time to buy, because it will always get cheaper. We
just wait for the puke.

Its when there are no bids.

Its when some funds are leveraged and margin-called.
When some funds have an involuntary need to sell, they puke and sell almost
at any price. They are so glad to get rid of it allowing you outstanding values.

Get a barf bag and collect all the vomit. Collect all you want.

Doing Due Diligence: Signposts

Visiting new and promising companies
Interviewing management and picking subtle clues toward potential success
or failure

 Understand Economics. Understand Trends.

Exponential Value of a Network =n * (n-1)

Wait Before You Pounce

The stock of the greatest company in the world is crap if every investor
already thinks it is the greatest company in the world. Sometimes you got to
wait for the next waterfall.