100-Baggers and the Coffee-Can Portfolio

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Imagine turning $10,000 into $1 million through a single investment. This is what investors call "100-baggers," stocks that return $100 for every $1 invested.

Thomas Phelps’ 1972 book "100 to 1 in the Stock Market" identified 365 such stocks from 1932 to 1971, and Chris Mayer’s 2015 "100 Baggers: Stocks That Return 100 to 1 and How to Find Them" found the exact same number (coincidentally) from 1962 to 2014.

Mayer's analysis found that the average 100-bagger took 26 years to achieve, with annual stock returns of ~20-21% needed to reach this milestone. These winners weren't limited to any particular sector but spanned railroads, retailers, beverage companies, and industrial firms.

This post explains the "coffee-can” portfolio strategy for finding and holding these exceptional investments and what drives their extraordinary returns. We'll also provide our insight on why, despite its compelling logic, this investment philosophy has important limitations.

A 100-bagger isn't just a theoretical concept. It's a stock that has generated life-changing wealth for investors who identified quality businesses early and held them through market cycles.

George F. Baker's dictum, cited in Phelps's book, perfectly summarizes the idea:

Investors can use the Rule of 72 to understand the mathematics behind 100-baggers. This formula approximates how long money takes to double by dividing 72 by the annual return percentage.

A stock growing at 20% annually doubles every 3.6 years (72 / 20). In 26 years, your investment would experience about 7.2 doublings (26 / 3.6), and each doubling multiplies your money by 2. This means 2^7.2 ≈ 148 times your initial investment, turning $10,000 into ~$1.48 million

Here's a visual we re-created from Mayer's book to illustrate the annual returns and years required to reach 100-bagger status (most companies fall within 16-30 years):

Notably, these returns don't come from speculative penny stocks.

In fact, many well-known companies have achieved 100-bagger status, including Amazon ($AMZN ( ▲ 0.2% )), Apple ($AAPL ( ▼ 0.3% )), Netflix ($NFLX ( ▲ 0.5% )), Microsoft ($MSFT ( ▼ 0.59% )), Starbucks ($SBUX ( ▲ 2.14% )), and many others.

Most importantly, 100-baggers follow identifiable patterns. They typically achieve high returns on capital (20%+), maintain the ability to reinvest profits at those same high rates even as they grow larger (rather than facing diminishing returns), and operate with management teams who own significant stakes (10-20% or more) in the business.

The coffee-can portfolio concept originated with Robert Kirby of Capital Group in 1984. The idea draws inspiration from the old west, where people stored valuables in coffee cans under mattresses for safekeeping.

Kirby's strategy is simple: select your best stocks and commit to holding them for 10 years regardless of market fluctuations. This approach eliminates transaction costs and, more importantly, protects investors from their worst enemy – themselves.

In the 1950s, Kirby discovered this strategy accidentally. His client's husband had secretly bought $5,000 of each stock Kirby recommended but never sold any, while Kirby actively managed the wife's portfolio. Upon the husband's death, Kirby found the untouched portfolio had dramatically outperformed his own, with one Xerox position alone ($800,000) exceeding the wife's entire account.

As Phelps wrote:

The coffee-can approach works because it:

A common objection to this approach concerns the declining longevity of companies.

Mayer’s book features a similar chart to the one below, although this chart is more up-to-date:

Mayer's book stated the average S&P 500 company lifespan was 61 years in 1958. According to Innosight in 2021, this is forecast to shrink to 15-20 years this decade (in the 2020s).

Despite this trend, Mayer argues the coffee-can approach still works when investors select businesses with durable competitive advantages and consistently high returns on invested capital.

Every 100-bagger is powered by two key factors working together: earnings growth and multiple expansion.

Monster Beverage ($MNST ( ▼ 0.8% )), a leading energy drink manufacturer, demonstrates this pattern perfectly. From 2001 to 2006, the company transformed from a small beverage business into a dominant player in the energy drink market.

During this period, its earnings grew 25 fold while its P/E ratio expanded from 10x to 50x. As Mayer notes:

Growth is non-negotiable for 100-baggers.

As Mayer’s emphasizes, companies that solve important problems while consistently growing sales, earnings, and cash flows provide the foundation for extraordinary returns.

The ideal scenario combines a business growing earnings at 20%+ annually while also experiencing multiple expansion as the market recognizes its quality. When these two forces amplify each other, returns become exponential rather than linear.

While identifying potential 100-baggers requires some knowledge, Mayer's research reveals several key characteristics to look for:

Rather than committing your entire portfolio, consider starting with a coffee-can allocation dedicated to potential long-term compounders.

The key is selecting businesses with the potential to grow for a decade or more and having the discipline to hold them through market cycles.

As Warren Buffett advised:

While the coffee-can approach offers a compelling path to 100-baggers, we believe a few practical considerations deserve attention:

In essence, the pursuit of 100-baggers isn't necessarily wrong, but it shouldn't come at the expense of sound investment principles.

Perhaps the most practical approach is to build a portfolio of high-quality businesses without specifically labeling any as "potential 100-baggers."

By focusing on fundamentals rather than targets, you can build a quality portfolio where potential 100-baggers can emerge naturally, without the pressure of identifying them beforehand.