Mark Mobius is famous as an emerging markets manager at Franklin Templeton, where he worked since 1987. (He retired this year… then unretired to start his own asset management firm.)
He’s also famous for his distinctive shaved head and white suits. He looks like actor Yul Brynner.
He’s racked up all kinds of awards.
He survived the investment game for more than 30 years – and he has wisdom to share.
In a February interview with financial magazine Barron’s, he opened up about a mistake he made – one that keeps many good investors from ever having a shot at a 100-bagger, much less a five-bagger.
I’ve spent years researching the best way to find 100-baggers.
Today, I’ll share how Mobius’ mistake can help you in your search for these big winners…
Let’s start with the interview. Mobius opined about many things and delivered a good line about bitcoin: “Whenever people ask me about bitcoin, I say I don’t talk about religion in public.”
But here’s the key exchange I want to draw your attention to:
Barron’s: What is a mistake you made that others can learn from?
Mobius: I was too rigid at times. We would focus too much on metrics like price/earnings and price/book ratios, and didn’t pay enough attention to the total picture. We didn’t have the imagination of what could happen over five or 10 years…
In my study of 100-baggers, I found that most were not obviously cheap at the time they began their runs.
Meanwhile, almost all of them required that their investors have a deep understanding of the business and a strong belief about their ability to grow. So armed, an investor could hold on through the rollercoaster rides that 100-baggers often give.
A truly great business that can grow many times its current size is not often available at a low price-to-earnings (P/E) ratio. If investing were as simple as buying stocks when they have low P/E ratios, then a lot more people would be rich.
But it is hard to get rich in such a rote way. And most people get stuck on one of their favorite metrics. I’ve done it. Almost everybody has.
Even the best investors make this mistake…
François Rochon, who founded Giverny Capital (and is currently one of its money managers), shared a classic example. At a Google Talk this past December, he reminisced about the now-famous coffee chain Starbucks (SBUX):
I looked at it, I think the first time was in 1994. I thought that was a unique business… When I first tried Starbucks, I said, “Well, these people are on to something, and they’ll do well.” … Howard Schultz was a very ambitious and a very driven CEO. He was very confident that Starbucks could have thousands and thousands and thousands of coffee stands everywhere in U.S. and in the world. I thought it was indeed possible…
But he didn’t buy it. Why not?
The only thing that prevented me to invest 23 years ago was the P/E ratio of Starbucks. I remember it was trading at 40 times earnings. That was way too high for me… I didn’t look lately, because it’s too painful, but the stock is probably 100-fold since then.
In fact, SBUX shares are up more than 100-fold since 1994, adjusted for dividends.
We have all probably had similar experiences as investors.
Another example makes a similar point. E-commerce giant Amazon (AMZN) has crushed retailers of all kinds. From Sears (SHLD) to Barnes & Noble (BKS) to Bed Bath & Beyond (BBBY)… all their stock prices have collapsed as Amazon took away sales and profits.
Yet, shares of electronics retailer Best Buy (BBY) have outperformed Amazon shares since the beginning of 2013. See the chart below…
Five years ago, I think you would’ve found few people willing to make the bet that Best Buy would stand a chance against Amazon’s onslaught.
Even the story of Amazon is a great dish of humble pie for many investors…
Back in 1998, I wouldn’t have touched it. The Internet bubble was on, and Amazon looked like a seriously expensive bookseller. When the tech bubble collapsed in 2000-2002, Amazon lost more than 90% of its value.
And yet, Amazon has delivered a return of 32% annually since 1998. A $10,000 investment would be worth $2.7 million today – even with that 90% drop!
Prediction is hard. Cause and effect is not easy to pin down. And valuation is not the only thing that should determine your buys and sells.
My point here isn’t to ignore valuation… That would be foolish. My point is not to rely on any single metric – of any sort.
This simple mistake has kept even great investors from making multiple times their money. To avoid it, remember to think more comprehensively about the business… And be humble about what you know.
Source: Daily Wealth