Editor’s Note: There’s an open secret around Palm Beach HQ: We consider Chris Mayer—Agora Inc.’s all-time best stock picker—an “honorary PBRG analyst.” It’s because of his fundamental commitment to bedrock safety first.
Once you learn to focus—relentlessly—on your downside risks, the upside takes care of itself. This approach has helped Chris garner average returns of over 17% per year for his subscribers.
Today, we sit down with Chris to find out how he does it… and how he plans to keep those numbers high in the face of a skittish market with few pockets of value left in it…
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J. Reeves, editor, The Palm Beach Daily: Chris, you’re a former corporate banker with 10 years of experience. You managed a $250 million portfolio and got stock options and a pension. But you left all the fame and power behind. Why?
Chris Mayer, chief investment strategist, Bonner & Partners: Because I have always had a passion for investing and I love to write. So I finally started my own newsletter, Capital & Crisis, in 2004 as a night and weekend hobby while I was in banking. And after six months, I was able to turn what was a hobby into a full-time gig. The rest, as they say, is history.
I think it’s important for people to know this because it shows that investing is not just a job I do to get paid. I love this stuff. I think about it all the time. I’m in the shower, I’m thinking about stocks. Every morning, I get up and can’t wait to get to the home office. It doesn’t feel like work to me. I think this gives me something of an edge.
I have no regrets about leaving banking. I’ve traveled all over the world to more than 30 countries. I’ve met all kinds of interesting people. I’ve written three books. And I’ve compiled an enviable track record in the bargain.
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Anyway, I really enjoy sharing what I’ve learned with my readers. Over the years, I’ve met many of them and some have even become friends. I take their trust and faith in me very seriously and I want to help them.
J.R.: Our readers have been shaken to the bone by repeated crashes and economic turmoil over the last 16 years. What would you say is the No. 1 threat facing the stock market today? How do you prepare your own portfolio to handle future shocks?
Chris: Good question. I think the big threat to attractive returns for many stocks is a fairly full price with not a lot of “levers” left to pull.
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We already have interest rates at near-nothing levels. So, no more gains from refinancing existing debts to lower interest expense (and boost earnings).
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Many businesses enjoy near-record profit margins. So, we’re unlikely to see a boost there.
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Many businesses already pay out most of their earnings in dividends and stock buybacks. So, no more room for financial engineering.
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And many businesses are not growing much. Several of the big-cap names carry big premiums and aren’t growing. Coke is an example. Analysts—who are usually an optimistic bunch—expect earnings growth of 2% for the next five years. Yet the stock trades for 24 times earnings. That’s a rich multiple for 2% growth.
You add all that up and it’s hard to get excited about future returns for, say, the S&P 500 index. But I don’t buy the S&P 500 index. I look at individual stocks. There are thousands of stocks out there. I only need to find about a dozen worth owning. And I’ve found some great opportunities this year.
As for how to handle future shocks…
I make sure I own only those names I have high conviction in. I make sure the price I paid is an attractive one. I stick with great balance sheets—lots of financial firepower and little debt. And I stick with great insiders, people who have skin in the game and a track record. That way, I’m prepared to hang on through the valleys and even buy more.
You have to take advantage of these shocks when they happen. During Brexit, we were quite active in the Bonner Private Portfolio. We picked up a new name on which we’re up almost 18% already. And we added to another name that is up more than 20% since we added. That’s how you really create value as an investor—stepping in when people are afraid.
And to do that, you need to have cash. At the Bonner Private Portfolio, we’re underinvested. We hold a lot of cash. And so, we welcome a pullback.
J.R.: Chris, you’ve racked up a track record unmatched in Agora Inc. history. At 17.7% average annualized returns, you’re just a hair under Warren Buffett’s lifetime record. At the same time, most hedge funds are grossly underperforming the market in 2016. What is the secret to your success?
Chris: I wish I knew. Seriously. It’s not so easy to self-assess. Nonetheless, I’ve thought a lot about that. I’d say it’s a combination of a few things.
One, I think my approach—encapsulated in the acronym CODE—is a sound and disciplined one.
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C stands for cheap. We only buy at cheap prices.
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O stands for owner-operator. We only invest in stocks where the insiders have skin in the game.
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D is for disclosures. We only invest in companies we can understand.
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E for is for excellent financial condition. We don’t take balance sheet risk. We avoid indebted companies.
Second, I do have a long-term orientation. I don’t mind waiting to get paid if I know the payoff will make it worth it. Patience is important. A lot of people can’t hold on to a stock even for just a year—especially if it goes nowhere or falls.
Third, I focus on the businesses and the things I can know. Way too many people still try to guess where the market is going or pay way too much attention to the bouncing around that stock prices do. There are many, many things that are simply unknowable and not worth spending time on. An appreciation of that goes a long way.
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J. R.: What’s different about your new project, Focus?
Chris: Unlike the Bonner Private Portfolio, Focus aims to invest in smaller, faster-growing companies. Market caps under $3 billion.
The investing philosophy there is a blend of CODE and a study I did of stocks that returned 100-to-1 from 1962 to 2014. I wrote it up in my book, 100-Baggers. It’s an update of a classic similar study by Thomas Phelps called “100 to 1 in the Stock Market” published in 1972. He looked at stocks that returned at least 100-to-1 from 1932 to 1971. Subscribers to Focus get both books for free.
Based on all this work, I’ve found some essential characteristics these stocks had in common. Focus is my attempt to apply those lessons in real time in the stock market today.
I’m very excited about this project. It’s one I’ve been thinking about since 2011, when I first discovered Phelps’ book.
J.R.: Thanks again for your time, Chris. Is there any final advice you can offer to nervous investors today?
Chris: Yes. There’s an old saying, “Sell down to the sleeping point.” Do that now. Don’t wait until the next correction and sell out at a bottom. Get your exposure to stocks to where you’d be comfortable leaving the money there for at least a few years, if you had to, and where a drop in prices wouldn’t freak you out.
If you can do that, you’ll be fine.
J.R.: Hear, hear.
Reeves’ Note: Chris used the CODE formula between 2004 and 2014 to give his subscribers the chance to turn every $100,000 invested in his ideas into $480,000.
Now, he’s added that formula to a new method that can turn $1 into $100 or $10,000 into $1 million. It’s called The Mayer Method: The Breakthrough New Formula for Finding Tomorrow’s Biggest Stock Market Winners, Today.
It’s all part of his new service called Focus… And it’s not too late to claim one full year of this new service for free. Plus, you can receive more than $1,579 worth of exclusive Charter Subscriber bonuses—free!
But to get all your bonuses, you must respond before this charter offer expires. You can get the full details here.
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