By Thomas W. Phelps, 1972 (302p.)
This classic was first published in 1972 and does not exist in digital format. “As I write these words, 100 to 1 in the Stock Market is out of print,” says author Marshall Glickman in a the Publisher’s Note to the 2014 edition, “and the lowest priced copy sells on Amazon for $683!” Recently-retired fund manager Chuck Akre mentions the book about 3 minutes into a 58-minute 2017 interview on YouTube (link). “In 1972 I came across a book that was reviewed in Barron’s called 100 to 1 in the Stock Market, written by a Boston investment manager whose name was Thomas Phelps,” Akre recounts, “and what was interesting to me was that it made me come around and focus on the idea of compound returns.”
The New York Times was not as enthusiastic as Chuck Akre when they reviewed the book in 1972 (link). Their complaint that “some of the stock choices may be a bit tendentious” and their conclusion that the approach is only “sound enough,“ suggests they missed the point. At least the reviewer repeated Phelps’ warnings that “no single formula works in investing,” and that “above all, no investor should ever marry a stock.” Incidentally, this same 1972 article shows the book selling for $6.95, meaning it too was basically a 100-bagger through its 2014 peak price. The most expensive 1972 edition I found today is going for $103.95 on eBay (link). Not surprisingly, the seller’s note states that it may show signs of wear plus highlighting and writing – which sounds about right.
Pages 142 and 143 of my Not for Sale 2014 Edition: CHAPTER XV: PROFITS IN ETHICS
Even though it took some grit to type out the highlighted excerpts below, I find Phelps’ style of writing so witty and brilliant that I enjoyed the task. As it is clear from the onset, the book’s main message is that if you want to make your dreams come true in the stock market, the thing to do is focus on identifying the highest quality growth companies to own for the long-term, and hold them for as long as they remain high quality growth companies. We know from experience that Phelps’ message is simple and easy to understand, yet hard to execute.
Tragically, Phelps (1923-1992) did not quite practice as a professional investor what he preached after his retirement. In Chapter XXII he writes: “Have I lived by this principle myself? The answer is sadly no. We are too soon old, and too late smart. Good judgement comes from experience. And experience comes from bad judgement. I have had a great deal of experience.” It’s safe to assume Phelps died wealthy, but his example serves as a warning to those who think it’s easy to stick with a concept just because you understand it. In the first chapter Phelps reminds us of George Baker’s (1984-1931) dictum: “To make money in stocks you must have the vision to see them, the courage to buy them, and the patience to hold them.” And patience, Phelps quips, is the rarest of the three.
In chapter VII, on trees not growing to the sky, Phelps gives an example of how big things can get if they sustain strong growth over decades. “To grow at a rate of 20 percent compounded annually for fifty years, a company must be 9,100 times as big at the end of the period as it was at the beginning. If you project that kind of growth for a company with $100 million of annual sales, you must expect those sales to reach $910 billion annually by 2021.” While trees do indeed stop before reaching the sky, companies are not quite like trees. Take Walmart’s 50-year record as an example. Its sales grew at a compounded annual rate of 15%, from $78 million in fiscal 1971 to $560 billion in fiscal 2021, making it today’s largest company in the world. But Amazon, which started in 1994 with only $20 thousand in sales, is expected to surpass Walmart within the next two years, with no sky in sight.
To those with interest in investing, I recommend this precious book, especially the passages I reproduced below. Like Phil Fisher’s, Thomas Phelps’ writings confirm that what we do at Victori is not new and has worked remarkably well throughout the ages. It truly does make dreams come true. So whether you choose to skip Phelps’ tendentious and outdated stock examples or not, this may still rank as one of the most valuable investment books you can ever read.
Thank you Thomas W. Phelps.
Even at $683, this book is a tremendous bargain for it has the potential to dramatically improve your long-term financial life.
The is no greater way to increase your wealth than to share in the equity and profits of a highly successful business.
This is a story – fact, not fiction.
Starting with 1932 a different stock could have been bought in each of thirty-two different years, and every dollar invested would have grown to $100 or more by 1971.
CHAPTER I: ASK, AND IT SHALL BE GIVEN TO YOU
Most try to make a few points quickly on their stock market speculations, or content themselves with 4 or 5 percent on their savings. Not one in a thousand seriously plans and acts as one must to make a fortune.
Most can’t resist the urge to cash in their winnings, however small. Others sell a good stock to get into something that seems better, perhaps because it is moving. Theirs is the fate of the dog in Aesop’s fable. You remember, the dog lost the piece of meat in his mouth by snapping at a seemingly larger piece reflected in the water.
It would be hard to find a worse slogan that “You’ll never go broke taking a profit.”
“Except to learn from experience,” Mr. Pettit replied. “In 1925 I personally owned 6,500 shares of Computing-Tabulating-Recording (now IBM). At the time there were only 120,000 shares outstanding. I sold mine for a million dollars – a lot of money in those days. Today they would be worth two billion dollars. What did he learn from that experience? Two things: (1) Sty with your most successful stock investments as long as the company is increasing their earnings. (2) Never forget that people whose self-interest is diametrically opposed to your own are trying to persuade you to act every day./
Try to identify people whose interests align to yours.
Many stocks have grown in the last fifteen years at rates which if continued will produce one-hundredfold appreciations in another fifteen or twenty years.
You don’t have even a thousand dollars? Sorry, there is no hope for you. I have it on the word of Andrew Carnegie: “You want to know if you will be rich,” he said, “the answer is, Can you save money?”
CHAPTER II: SIMBAD’S VALLEY OF DIAMONDS
Except by hindsight these 100-to-1 opportunities in the stock market are hard to spot.
There is another reason why professional investors, except those managing discretionary accounts, should de-emphasize market timing. This is because even if the market forecaster is right, he seldom can persuade other to act on his opinion. No one intends to buy stocks at the top of the market, or to sell them at the lows. … since bull markets and bear markets are to a considerable extent manifestations of mass psychology it is fatuous for anyone to believe he can persuade a representative group to sell stock when the mass psychology is bullish, or to buy when it is bearish. The wise investor, who understands this, concentrates on stock selection. Most investors are far less emotionally involved in deciding which stock to buy or sell than they are in deciding whether the market is going up or down. To clinch the argument, it is readily demonstrable that far more money can be made by good stock selection than by good stock market timing.
CHAPTER III: LEARNING FROM ELEPHANTS
Forty-six years ago, when I was paying my way through equatorial Africa by shooting elephants for ivory, I learned this simple principle: When looking for the biggest game, be not tempted to swing at anything small. Elephants’ ears are very keen. Never after firing a single shot at a guinea hen, a colobus monkey, or an antelope did I see an elephant that day.
Few investors, private or professional, seek the big game. They focus on chances to make five points here and ten points there. They rush to buy on information that the next quarter’s earnings will show a good increase, or to sell when they hear that profit gains have slackened.
A problem well-defined is half solved.
The only thing worse than making an investment mistake is refusing to admit it and correct it. Usually the faster an error is rectified the less it costs. But it is still an error, a lost opportunity, compared with buying right and holding on.
The big risk in correcting errors in the stock market is that stocks look best to so many of us when their prices are highest, and worse when their prices are lowest. Almost irresistibly we are tempted to shoot where the rabbit was, to do what hindsight shows would have been the right thing to do yesterday, last year, or even five or ten years ago.
Good stocks do rise, and rise, and rise.
Another often unrecognized investment fallacy is that avoidance of risk is more important than seizure of opportunity.
To go from one to 100 in twenty-five years the price of a stock must increase at a compound annual growth rate of more than 20 percent, not including dividends. The seller of such a stock after twenty years gets less that 40 for one before taxes and brokerage commissions. The remaining 60 for one comes in the last five years if the rate of price increase is constant.
There is no reason, of course, to sell at any time just because one has a big profit, even a 100-to-one profit. In fact one of the basic rules of investing is: Never if you can help it take an investment action for a non-investment reason. What are some of the non-investment reasons for which tens of thousands of investors go wrong? Let me cite a few:
- My stock is “too high.”
- I need the realized capital gain to offset a capital loss.
- My stock is not moving. Others are.
- I cannot or will not pump up more money to meet my margin call.
- Taxes will be higher next year.
- New management.
- New competition.
Much has been said since 1932 about keeping investors fully informed. I sometimes wonder if we are not told more than is good for us.
Investors should beware of confusing cynicism with sophistication.
If you really think a stock is attractive, buy it at the market. Then if it becomes available at a lower price, buy more if you can.
It is not necessary to buy little-known stocks in the dark of the moon to get hold of a fortune-maker.
Thinking too much about what the market is going to do can be expensive, even when one is right.
For sixteen years, from 1952 to 1968, the stock failed to keep up with the Dow Jones Industrial Average. Few if any clients would have stayed with an investment advisor through such a period.
Good timing and good selection is better than either alone, but bear market smoke gets into one’s eyes and blinds him to buying opportunities if he is too intent on market timing. And the more successful one is at market timing, the greater the temptation to rely on it and thus miss the much bigger opportunities in buying right and holding on.
You must know yourself well enough to know that you will not switch policies mid-stream.
Most deception is bad bu8t self-deception is the worse because it is done against such a nice guy.
CHAPTER IV: LEMMINGS FOLLOW THE CROWD
To make the most money in the shortest possible time, you should buy a good stock when nobody likes it. The difficulty is that good stocks seldom are without friends.
There is a Wall Street saying that a situation is worth more than a statistic
What makes a stock good? When asked that question most people think of earnings. They are right, to a point. A stock can also be good because of assets even though those assets are earning nothing at the moment.
CHAPTER V: FORESIGHT VS. TENACITY
Again and again this survey of the big winners in the stock market emphasizes that it is more important to be right than quick.
In the stock market fortune wears many disguises.
How did Tampax look to investors thirty years ago? … Hardheaded investors discounted the company’s future because “they’ll never be able to advertise it.”
Wall Street has its fads and fashions just as Paris does. A stock that is not in vogue may do a great job for its owners without attracting much speculative attention.
CHAPTER: VI WE’D DIE FOR DEAR OLD GLOBE & RUTGERS
CHAPTER VII: THE TREE DOES NOT GROW TO THE SKY
Everyone can see the past. Hence, stocks that faithfully earn next year what they earned last years tend to be fully priced.
It is true that time is on the side of the growth stock buyer if the growth and the expectation of growth continue.
The mere fact that a stock has been a growth stock for ten or fifteen years is no warranty that it will continue to grow even one more year.
To grow at a rate of 20 percent compounded annually for fifty years, a company must be 9,100 times as big at the end of the period as it was at the beginning. If you project that kind of growth for a company with $100 million of annual sales, you must expect those sales to reach $910 billion annually by 2021.
To win in the stock market, as well as in checkers, one must think at least one move further ahead than the other fellow.
CHAPTER VIII: HOW TO ARGUE AND WIN
The point is not that any of the men involved were willfully misleading the public. I believe they were all sincere. But those three experiences taught me this: (1) Never mind opinions, and (2) No one knows or ever can know for sure what the future holds.
Don’t be dismayed by a loss. Recognize it as one of the costs without which you could not have net gain.
I know of no rule, system or philosophy that will keep an investor from making mistakes or hold him harmless when he is wrong.
One of the most persistent illusions of the business of investing is that information is all you need to make money. Organizations that sell information foster that illusion. It is good for their business.
If information is everything, how can two informed professionals come to opposite conclusions about the same security at the same price at the same instant in time? … no one can be informed about the future.
Joseph Kennedy once said to me: “If I had all the money that has been lost on inside information I’d really be rich.”
Even if one’s information is complete and accurate, it can still be misleading investment wise if it is late.
CHAPTER IX: FIGURING THE ODDS
The principle of relative values is at least as old as the Bible.
Late in 1961 when the stock market was exuberant I remarked to the first chairman of the SEC, Joseph P. Kennedy, “People don’t care about dividends anymore.” “Where are these people,” Mr. Kennedy challenged. “I never met one.”
Most great advances in the stock market result from some combination of rising earnings and rising price-earnings ratios.
Buying right will do you little good unless you hold on. But holding on will do you little good – and may do you great harm – unless you have bought right.
In the bright light of hindsight it can often be seen that the stock market has gone to unjustified extremes. It is much safer for the investor to proceed on the basis that these unwarranted extremes result from the common human inability to foresee the future rather than from stupidity. As a matter of fact, in the stock market money tends to move from stupid to intelligent hands.
CHAPTER X: THE QUALITY OF EARNINGS IS STRAINED
One of the worst delusions of the investment business is the uncritical us of price-earnings ratios.
I am reminded of the World War I veteran who lost his job and turned to beggi9ng under a placard reading:
Three years in the trenches.
Seven months out of a job.
Do we perhaps pay lip service to these differences [in quality of earnings] while using statistical procedures which ignore them?
The business of the stock market is to cash in on the future now.
Scrupulous attention to the wide potential variation in quality of earnings may some day save your life. … How can you as an individual investor adjust or correct reported earnings for such differences in quality? In reading annual reports you can look for such variables as I have just cited. It is no jab for an amateur, though, particularly not after a big dinner.
CHAPTER XI: MANIPULATION DESPITE THE SEC
Shooting where the rabbit was is one of the most common investment errors.
The moral of all this takes us back to Mr. Barron’s, “The fact without the truth is false. Always connect.”
In Africa, where there are no antelope there are no lions.
CHAPTER XII: KEEP YOUR EYES OPEN ON THOSE RANDOM WALKS
I have been in both camps. My conclusion after forty-four years of observation and study is that technical work is not an alternative to fundamental security analysis.
When a stock persistently fails to act the way it should on the basis of the information I have, I conclude that I am missing something and redouble my efforts to find out what it is.
“The trouble with economics and finance,” Mr. du Pont said, “is that we are always working with dirty test tubes.”
Chart-induced excesses in the market should be welcomed as providing investment opportunities for those who understand the fundamentals of the situation.
The greatest danger in chart, to my mind, is the temptation to use them as a guide to trading, thereby losing sight of the greater opportunities to buy right and hold on.
By perfect timing on those major swings you would have increased your starting capital fortyfold. Meantime hundreds of stocks had risen more than one hundredfold. Were you aiming at the right target?
CHAPTER XIII: EXPERIENCE SOMETIMES A POOR TEACHER
We used to have a boxer named Prince. He was dumb but not stupid. Not being that smart, Prince confused memory with reasoning, and acted on memory. In the stock market many people seem to do that too. They do now what hindsight shows would have been profitable if they had done it ten days, ten months, or ten years earlier, under quite different conditions. They shoot where the rabbit was. I have done it myself.
When asked how much it cost to run his yacht, the Corsair, Mr. Morgan replied, “If it matters, you can’t afford it.”
Catching swings in the market, even when one is reasonably successful at it, makes pennies compared with the dollars garnered by those who buy right and hold on.
CHAPTER XIV: WHY COMPUTERS WON’T RUN THE WORLD
Nothing is worth anything unless someone wants it. Anything is worth what someone will give you for it and no more.
In business, it is bad luck to tell people what they should want instead of giving people what they do want. This is what we mean when we say the customer is king. There has never been a successful revolution against him.
CHAPTER XV: PROFITS IN ETHICS
A man who will steal for you will steal from you. Ask yourself whether the company is which you contemplate investing is contributing to making this world a better place.
The moral cancer thus introduced cannot be extirpated simply by removing the evil genius at the top. It may take a generation under a good management to purge the organization of the unprincipled sharp-shooter brought in by a bad management. Hence it is unwise to look for a quick turnaround in an organization whose management has demonstrated a lack of moral principle.
Man is the creature most difficult to keep in jail because man makes the jail.
The best defense against them [unethical people] is to run away from them as fast as possible at the first hint of sharp practice.
Bet on men and organizations fired by zeal to meet human wants and needs, imbued with enthusiasm over solving mankind’s problems. Good intentions are not enough, but when combined with energy and intelligence the results make it unnecessary to seek profits. They come as a serendipity dividend on a well-managed quest for a better world.
CHAPTER XVI: THE ALMIGHTY EGO VS. THE ALMIGHTY DOLLAR
Egonomics is the art of judging every issue, making each decision, on the basis of what it will do for your ego.
The story of the school boy illustrates how an egonomist’s mind works. “What’s two plus two?” his teacher asked. “Am I buying or selling?” the puil replied.
What does egonomics have to do with investing? A very great deal. I don’t like it and wish it were no so. But as my realistic partner, Hardwick Stires, puts it, “This is the way things are. If you can’t abide it, you can shoot yourself.”
In a free society those who direct the investment of people’s money into ventures showing far below average rates of return on the capital required are sabotaging our economy, whether they know it or not.
The last emotion to die is pride.
Profits are the reward of human spirit and high endeavor – of great leadership.
My judgement was right. The stock never proved a bargain at any price.
CHAPTER XVII: NO INFLATION-CONTROL PILL
Now that so many democratic governments have assumed or accepted responsibility for the economic climate, the need for more widespread understanding of money is vital and urgent.
The practical question is not whether we should have inflation or not but how much, how fast. What does this mean to common stocks? The short answer is that inflation makes stocks rise.
Inflation is most bullish on common stocks when it follows a deep depression and is not generally expected. Rising demand for goods and services can be met by putting idle production facilities to work. But when inflation persists for long enough so that everyone is aware of it, and when the rate of inflation becomes high enough to be a political liability for whoever is in power in Washington, it is no longer automatically beneficial to corporate earnings and may become detrimental to them.
There is nothing good or bad about debt and interest per se despite the Puritanical injunction, “Neither a borrower nor a lender be.” Many people have been ruined by debt. Many others have made their fortune with borrowed money. … To my mind it is just as bad a mistake for a businessman not to borrow when he could do so profitably as it is for him to borrow unprofitably. A businessman, did I say? I mean anyone.
When any rule, formula, or program becomes a substitute for thought rather than an aid to thinking, it is dangerous and should be discarded.
Actually people did believe twenty-five years ago that interest rates would be permanently low. Why else would they have bought long-term bonds to yield 2-1/2 percent or less? … After such a prolonged decline people who confuse memory with reasoning, as most of us do, are sure interest rates will never rise again.
If these examples seem tedious and complicated, I can assure you they are simple compared with the actual investment problem encountered every day. All I am trying to show is the impossibility of proving in advance, mathematically, how any investment will work out. The bigger your computer, the more sophisticated your program, the more varied the assumptions you can evaluate. But when all is said and done, the future is still unknown and always will be.
CHAPTER XVIII: PICKING THE RIGHT ONE
The master plan is to buy right and hold on.
CHAPTER XIX: WHERE TO LOOK FOR THE BIG WINNERS
Low-priced stocks, like the poor, are always with us.
Money won at Russian roulette may buy as much groceries as money earned any other way, but as a means of earning a livelihood Russian roulette has a well-deserved place at the bottom of the totem pole.
Opportunities to profit by capital leverage are easy to fin. What is hard is deciding whether the added profit potential out ways the added risk.
It is vitally important that the high rate of return be protected by a “gate” making entry into the business difficult if not impossible. .. Just be sure the gate is strong and high.
Thousands of investors have owned one or another of these 100-to-one “high-gate” stocks at some time or other in the last forty years. Probably not one in a thousand has held his winner until it increased one hundredfold in value.
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
Long-term capital growth is tied to long-term earnings growth.
CHAPTER XX: GETTING AWAY FROM IT ALL
Money, interest, and inflation all have an important bearing on the investment climate in which your investment favorites will run. But the most significant factor of all is people and their views. What are hopes, their aims, their beliefs?
CHAPTER XXI: ITS NOT TOO LATE
CHAPTER XXII: CHEER FOR THE YOUNGER GENERATION
Figures never tell the whole story of any company.
Every human problem is an investment opportunity if you can anticipate the solution. Except for thieves, who would buy locks?
CHAPTER XXIII: HOW TO AVOID MISSING THE BOAT NEXT TIME
The basic reason so few of us have ever made $100 on a $1 investment is that we have never tried to do so. In a sense we have been brainwashed into looking for and acting on types on information that have little or nothing to do with multiplying one’s investment one hundredfold.
Much investment research is misdirected from the point of view of one wanting to increase his capital rather than “play the market.”
Brokers live on commissions on transactions. I know because I was a broker for eleven years, and a partner at that. There are two primary ways to generate commission business. One is to give such good service, including investment advice, that more and more people come to the brokerage house to do their buying and selling. The other way to generate commissions is to point out reasons why the clients the firm already has should sell the stocks they own and buy other stocks. I used to try to do both.
In life the finish line is death, and at that time all potential capital gains tax liability on unrealized gains is forgiven, at least under the law in 1971.
It is a paradox that the investor seeking to multiply his capital by 100 actually runs less risk than the individual trying to make five points or even double his money. There are at least five reasons why this is so:
- There is always a market for the best of everything. … That is as true of stocks and bonds as it is of real estate and antiques.
- Buying for maximum long-term growth avoids the pitfall of underestimating other people.
- When you buy a stock with a superior profit margin, an above-average rate of return on invested capital, and sales that are growing faster than the industry’s or the country as a whole, you have time on your side.
- In real life anyone smart enough to make a better mouse trap would not stop there.
- “Don’t marry a man to reform him,” a wise mother counselled her daughter. It is seldom profitable to marry a stock to reform it either.
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.
As editor of Barron’s I worked with a Harvard professor on a business index in the mid-1930s. His final conclusion was that the secular trend in America was inclined slightly downward.
The investor dedicated to buying right and holding on picks managements, products, and processes he thinks able to cope with the unforeseeable as it hoves into view.
One of every man’s primary investment objectives should be to make as much money as possible while paying as little taxes as possible under whatever laws are in effect at the time.
Wall Street lives on activity. Every transaction carries a commission. Since the customers demand action, and since action pays the rent, why not give them what they want? … Getting out of a threatened stock until the situation has clarified is not only good for business but may save the customer’s shirt as well. If the broker or investment counselor advises a sale he at least shows that he is aware of what is going on in the world. Not to act might well lose the account, especially if the stock acted badly for the next year or two.
“Everyone tells me to get into cash,” my client said at our last meeting. “What makes you think you know better?”
My case was like that of the man who died in a traffic accident where he had the green light.
CHAPTER XXIV: “BUY RIGHT AND HOLD ON” IN PRACTICE
Only the most exceptional individuals have the will power to adopt such a course and hold to it through the bad years that punctuate almost every stock rise.
Excessive diversification dodges rather than solves the investment problem.
CHAPTER XXV: DO IT YOURSELF?
Lawyers have a saying that anyone who tries to be his own lawyer has a fool for a client.
Stubbornness is no substitute for savvy in investing.
Every sale should be recognized as a confession of error – a lost opportunity. There will be many such errors, of course. Making money is not easy and never will be.
CHAPTER XXVI: A SENSE OF VALUES
Many a man is on relief because he paid too much for what he correctly foresaw.
Time is an often overlooked element in value.
In a free society, life is a series of trades.
Someone wrote a popular play years ago about a young man who breathed new life into an ailing soap business by cutting the cakes in half and doubling the price. Enough people inferred that the higher-priced soap must be better for their skins to make them avid victims of his trickery.
In these and so many other ways, stock trading is more a study in psychology than in finance and economics.
CHAPTER XXVII: WHAT MAKES A STOCK GROW
What makes a stock grow? Look for these possibilities:
- Reinvesting earnings at a constant or rising rate of return on invested capital.
- Investing borrowed money to earn more than the cost of capital.
- Acquiring other companies by exchange of high P/E stock for a low P/E stock.
- Increasing sales without having to increase invested capital.
- New inventions, processes, or formulas for filling human needs not previously met, or for doing essential jobs better, and/or cheaper.
- Contracts to operate facilities for others.
- Rising price-earnings ratios.
If we knew in advance that a research project was going to pay out, it was not research but only product development.
CHAPTER XXVIII: REAL GROWTH – HOW TO SPOT IT AND EVALUATE IT
Earnings power is competitive strength. It is reflected in above-average rates of return on invested capital, above-average profit margins on sales, above-average rates of sales growth.
A little learning is a dangerous thing.
Much can never be foreseen or even imagined. The one way to benefit by it is to buy the best stock or stocks you can with no intention of selling them until they turn bad. If history is any guide, some will end up in your high bracket estate.
To buy right requires vision and courage – faith that is evidence of things not seen, things not susceptible to mathematical proof.
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.