The four categories I see are these:
1. Advance primarily due to recovery from extremely depressed prices at bottom of greatest bear market in American history. Special panic or distress situations at other times belong in this group too.
2. Advance primarily due to change in supply-demand ratio for a basic commodity, reflected in a sharply higher commodity price.
3. Advance primarily due to great leverage in capital structure in long periods of expanding business and inflation."
4. Advance primarily due to the arithmetical result of reinvesting earnings at substantially higher than average rates of return on invested capital."
85. "My fourth category of stocks showing one hundredfold appreciation is that of companies reporting a far above-average rate of return on invested capital for many consecutive years. In such issues the investor has simple arithmetic and Father Times on his side. Even in this category, however, there is no free lunch, no "sure thing". First there is the danger that the high rate of return on invested capital may attract too many competitors. 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 of not impossible. Such gates may be patents, incessant innovation based on superior research and invention, ownership of uniquely advantageous sources of raw material, exceptionally well-established brand names – you can fill in others as you choose. Just be sure the "gate" is strong and high. Most of us want pretty much the same material things in life – good food, good clothes, a home on the right side of the railroad tracks, good schools for our children. To get more than the average we must be able to do more than the average, or do what we do better than the average. If all we can do is take in washing there will always be someone down the street ready to take it for two cents a pound less than our price.
Thousands of investors have owned one or another of these 100-to-one "high-gate" stocks at sometime or other in the last forty years. Probably not one in a thousand has held his winner until it increased one hundredfold in value.
All of course wish they had done so. Yet it would be just as great a mistake to assume that what has been will continue to be forever and ever. Or to pay now for all the growth that can be foreseen.
To increase one hundredfold in value in forty years a stock’s price must advance at the compounded annual rate of 12.2 percent. The rates of increase required to multiply a stock’s value by 100 in fewer years than forty are these.
35 years -14 percent
30 years -16.6 percent
25 years – 20 percent
20 years – 26 percent
15 years – 36 percent
"Don’t marry a man to reform him," a wise mother counseled her daughter. It is seldom profitable to marry a stock to reform it either. Sometimes, as with husbands, the hoped for reform never comes. Even when it does come, it is often sadly delayed. Hope deferred maketh the heart sick. Your turnaround candidate may double in price, your gain is at the compound annual rate of only 7.2 percent.
Perhaps the greatest advantage of all in buying top quality stocks without visible ceilings on their growth is that when we do so we give ourselves the chance to profit by the unforeseeable and the incalculable."
92. "The secret of success in your quest for 100-to-one stocks is to focus on earning power rather than prices. Can you do it?"
93. "What is the difference between earnings and earning power? Earnings are simply reported profits no matter how obtained. As we have already seem, earnings may rise because of a sudden, non-recurring surge in demand, because of a price advance, because of a change in accounting practices, because of improvement in business generally which permits utilization of what previously was excess productive capacity. None of those reasons reflects earning power any more than the movement of a cork downstream attests its motive power.
Earning power is competitive strength. It is reflected in above averages rates of return on invested capital, above average profit margins of sales, above average rates of sales growth. It shows to best advantage in new or expanding markets.
Failure to distinguish between ephemeral earnings fluctuations and basic changes in earning power accounts for much over trading, many lost opportunities to make 100 for one in the stock market.
Too much research in Wall Street is not even directed at making
In Alice in Wonderland one had to run fast in order to stand still. In the stock market, the evidence suggests, one who buys right must stand still in order to run fast."
-----------------------------------------
Subsequent 30 year returns of Nifty Fifty stocks, within this non-tech seems to have generated in-line returns (reminscent of consumer stocks in India)
Table 1 Morgan Guaranty
P/E Ratios and Annualized Returns
|
1972
P/E
|
Annualized
Return
| ||
| Polaroid |
90.7
|
-14.68
|
|
| McDonald's |
85.7
|
10.50
|
|
| MGIC Investment |
83.3
|
-6.84
|
(1.41)
|
| Walt Disney |
81.6
|
8.97
|
|
| Baxter Travenol |
78.5
|
10.10
|
|
| Intl Flavors & Fragrances |
75.8
|
5.66
|
|
|
|
65.4
|
6.04
|
|
|
|
62.1
|
-1.37
|
(-0.16)
|
| Johnson & Johnson |
61.9
|
13.35
|
|
| Digital Equipment |
60.0
|
0.93
|
(7.14)
|
| Kresge (now Kmart) |
54.3
|
-1.07
|
|
| Simplicity Pattern |
53.1
|
-1.47
|
(-1.32)
|
| AMP |
51.8
|
11.17
|
(11.92)
|
| Black & Decker |
50.5
|
2.45
|
|
| Schering |
50.4
|
13.19
|
|
| American Hospital Supply |
50.0
|
12.36
|
(5.16)
|
| Schlumberger |
49.5
|
10.37
|
|
| Burroughs |
48.8
|
-1.64
|
|
| Xerox |
48.8
|
0.89
|
|
| Eastman Kodak |
48.2
|
1.72
|
|
| Coca-Cola |
47.6
|
13.15
|
|
| Texas Instruments |
46.3
|
11.27
|
|
| Eli Lilly |
46.0
|
13.14
|
|
| Merck |
45.9
|
14.27
|
|
| Upjohn |
41.1
|
9.95
|
(10.98)
|
| Chesebrough Ponds |
41.0
|
10.96
|
(6.55)
|
| Minnesota Mining (3M) |
40.8
|
9.78
|
|
| American Express |
39.0
|
10.30
|
|
| American Home Products |
38.9
|
13.13
|
|
| Schlitz Brewing |
38.7
|
6.68
|
(-0.67)
|
| Halliburton |
38.3
|
3.19
|
|
| IBM |
37.4
|
9.68
|
|
| Lubrizol |
36.9
|
7.62
|
|
| J.C. Penny |
34.1
|
4.83
|
|
| Squibb |
33.9
|
14.21
|
(10.26)
|
| Procter & Gamble |
32.0
|
11.94
|
|
| Anheuser-Busch |
31.9
|
13.55
|
|
| Sears Roebuck |
30.8
|
6.94
|
|
| Heublein |
30.1
|
14.66
|
(4.20)
|
| PepsiCo |
29.3
|
15.55
|
|
| Pfizer |
29.0
|
16.99
|
|
| Bristol-Myers |
27.6
|
15.35
|
|
| General Electric |
26.1
|
15.57
|
|
| Revlon |
26.1
|
12.40
|
(6.05)
|
| Phillip Morris |
25.9
|
17.68
|
|
| Gillette |
25.9
|
14.12
|
|
| Louisiana Land & Exploration |
25.6
|
4.91
|
(8.54)
|
| Dow Chemical |
25.5
|
10.80
|
|
| First National City |
22.4
|
13.36
|
(12.11)
|
| ITT |
16.3
|
9.99
|
|
| S&P 500 |
19.2
|
12.01
|
|
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