Source: Smart Investors, Shiguan Investment in Other Mountains
Author: Saint Paul

Peter Lynch created the 10-bagger (10-bagger) statement. Being able to successfully get a 10x return on an investment will attract a lot of attention.

So if we go one step further and get a 100x return on investment, what would it be like?

$NVIDIA (NVDA.US)$That's one hundred times the share. Over the past 11 years, it has risen from over $2 per share to now $1,200.

In the process, many investors in Nvidia were able to make money, but few investors were able to profit more than 100 times.

O'Keefe Stevens Advisory is one of them. The company's founder Peter O'Keefe (Peter O'Keefe) bought Nvidia in April 2013 at a purchase price of $3.1 (split adjusted price), with a market value of $7.7 billion.

Today, Nvidia's stock price has reached 1,224 US dollars, with a market capitalization of 3.01 trillion US dollars!

O'Keefe's return over these 11 years was more than 150 times, making it the most successful investment in his 40-year investing career.

History is the best teacher.

By sharing how O'Keefe thought about this company during his time owning Nvidia, we were also able to understand what he experienced during this process.

However, we can't see success in the rearview mirror. Investors wouldn't have known 11 years ago that artificial intelligence would reach its current level and that Nvidia played a key role in it. Investors are beginning to position Nvidia as just a GPU provider that enhances the effectiveness of computer games.

Since then, Nvidia has continued to expand its market and build and expand its own moat during development, driven by waves such as Bitcoin mining, telecommuting under the influence of the epidemic, and artificial intelligence applications. The stock price also continued to rise amidst twists and turns.

What is invaluable is that for O'Keefe, the positioning and perception of the company will continue to evolve during the ownership process, and he will also continue to reposition the company from this to help him gradually realize the value of the enterprise.

It is also this process of continuous learning and self-correction of cognition that allows O'Keefe to continue to hold on to this great company without fear of short-term twists and turns, bringing hundreds of times more rewards.

Here's a summary of O'Keefe's investment in Nvidia from his own rock.

01. Start investing

O'Keefe's initial investment in Nvidia was in April 2013. Nvidia is a leading developer of 3D graphics and multimedia processing technology used in personal computers.

At that time, Nvidia was unpopular and unpopular because growth in Nvidia's biggest market: the computer game market, was slowing down. As a result, O'Keefe was able to buy its common stock at a low price.

This company was not discovered by O'Keefe himself, but was inspired by legendary investor Marty Whitman of Third Avenue Value Fund to begin research and purchase at a purchase price of $3.1 (split and adjusted price).

At the time, Nvidia's position in O'Keefe's eyes was a company with good financial conditions and dominant market share. Here are some facts:

1. Nvidia invented graphics processing units (GPUs) and dominates the GPU market, and its share continues to expand.

2. The financial situation is good, with only $19 million in debt and $3.7 billion in cash.

3. The company's after-tax profit increased from US$85.6 million in 2003 to US$562.5 million in 2012.

4. The company began to pay cash dividends in the fourth quarter of 2012.

5. The company invests 25% of its revenue in R&D, and most of its 7,100 employees work in R&D.

6. The company is buying back its common shares.

7. At the time, the company's price-earnings ratio was 14 times.

From every perspective, many of the metrics Nvidia valued at the time didn't seem expensive. Nvidia remained O'Keefe's favorite investment target for the next two years.

A lot of changes are happening. For example, gross margin increased from 34% to 52% in the past four years.

The company's business is constantly improving, but it's not obvious.

Furthermore, the company did not grow at a very high rate and did not have a high return on capital.

Judging from the financial data at the time, this was not an obvious super-performing stock.

O'Keefe's investment logic at the time was based more on the growing importance of GPUs in video games and mobile phones, and Nvidia's dominant position in the market.

At this time, O'Keefe saw no sign that Nvidia had become 100 times the stock.

02. Change+increase positions

By May 2015, Nvidia's annual report discussed not only its computer game chips, but also other fields. Among the topics discussed in the report are:

1. The computer game industry is worth 100 billion US dollars and is the largest entertainment industry in the world, surpassing Hollywood and professional sports. And it continues to grow.

2. We launched Nvidia ™️ (Nvidia®) DRIVE, the world's most advanced on-board computer, which allows cars to increasingly perceive the world around them and will pave the way for autonomous vehicles.

Furthermore, Nvidia GPUs are widely used in the field of deep learning. Deep learning is being ignited by three trends:

• A flood of data brought about by network service companies;

• The latest breakthroughs in algorithms created by some of the smartest people in computer science;

• Also, the ability to calculate massive amounts of data using GPUs.

GPU-powered machines are used to provide a variety of applications that make interaction with computers magical. Users can ask questions to their phones and get immediate voice responses.

Voice recognition is just one such application. Image recognition is another application.

And these are just the tip of the iceberg.

O'Keefe discussed it with the team and realized “we have a very special investment.”

As a result, they continued to buy more shares at around $5 per share (the price after split), which is 60% higher than the price they initially purchased.

Additionally, O'Keefe began listening to Nvidia's quarterly investor conference calls with management to better understand the company's business. Each quarter is a learning experience in improving the financial situation and releasing new products.

03. Important turning point

An important turning point for O'Keefe was the May 12, 2016 conference call. Nvidia reported strong financial results for the first quarter, with highlights including:

1. Revenue reached $1.3 billion, up 13% year over year — growth across all platforms

2. Earnings per share in accordance with US GAAP were $0.33, an increase of 38% over the same period last year. Non-GAAP earnings per share were $0.46, up 39% year over year.

3. Rapid growth in the number of customers in the deep learning sector

CEO Hwang In-hoon said in a press release:

“Our new Pascal GPU architecture will provide a huge boost to deep learning, gaming, and VR (virtual reality). We're excited to bring a new wave of innovation to the markets we serve. The Pascal processor is in full production and will be available later this month.”

This means that Nvidia has identified the huge potential for the future development of artificial intelligence and has officially established its leading position in artificial intelligence processors.

A few weeks later, O'Keefe held a meeting in New York, and Nvidia's common stock had risen sharply to around $48 a few days before the meeting.

Speaking to long-time customer Jerry, O'Keefe said, “I think this might be a $300 stock!”

Customers have been making fun of this phrase for the past 8 years because it turns out to be the most understated sentence in a decade.

Since Nvidia shares appreciated more than 15 times the initial purchase price of O'Keefe, he sold some of his Nvidia shares at a price of approximately $180 per share on October 5, 2017 to reduce his position, as it had become an overinvestment.

04. Inevitable Fluctuations

By October 2018, a year later, the price of Nvidia shares had exceeded $290 per share.

Just a month later, Nvidia announced excess inventory due to falling cryptocurrency prices. Cryptocurrency miners using GPUs are$eBay (EBAY.US)$And other websites sell their chips.

By Christmas Eve, in just 2 months, Nvidia's stock price had dropped by more than 57%, trading at less than $130 per share. In O'Keefe's perception, this event was a good opportunity to open a position.

From this low point, Nvidia's stock price increased nearly tenfold in the next three years.

On March 11, 2019, Nvidia announced the acquisition of Mellanox.

O'Keefe and his family attended the Nvidia Annual GPU Conference held in San Jose, California from March 17 to 21, to learn firsthand about many of Nvidia's technologies, including autonomous vehicle demonstrations.

In a conversation with a venture capitalist, O'Keefe learned an interesting fact. “As far as he knows, no artificial intelligence startup uses any chips other than Nvidia GPU chips.”

By mid-2019, Nvidia's stock price began to rebound from cryptocurrency inventory issues.

In Nvidia's annual report released in early 2020, Hwang In-hoon said:

“Nvidia is focused on speeding up computing and solving important challenges that ordinary computers can't solve.

We innovate at the intersection of computer graphics, high performance computing, and artificial intelligence, and our core is a real-time simulation company — simulating the world, physics, and intelligence.”

In 2020, when the COVID-19 pandemic began, Nvidia's stock price first fell from $235.32 at the end of 2019 to $180, then rose to $525.84 at the end of 2020 amid a boom in investment in technology companies stimulated by heavy flooding and working from home, an increase of more than 120% during the year.

Nvidia's strong financial position and common stock performance continued until 2021, and the company also carried out a stock split of 1 split 4 on July 21, 2021.

During 2021, the company's share price after the split rose from $131.46 to $295.86. This year's increase was more than 160%.

By the end of 2021, the investment market began to become more and more obsessed with Nvidia, and the stock price officially became O'Keefe's first 100x share on November 9, 2021.

Entering this uncharted territory, I also asked O'Keefe to buy and read Christopher Mayer's book “How to Find Stocks That Return 100 Times” to study this phenomenon.

It is unlikely that 100 times the pace of shares will be smooth sailing.

Entering 2022, the shadow of the Federal Reserve's interest rate hike gradually became apparent, and the financial market began to decline, and major technology stocks were hit particularly hard. Nvidia is no exception.

By October 13, 2022, Nvidia had fallen to the bottom of $108.13, a drop of 67% in less than a year.

Of course, O'Keefe also lost the legend of 100 times its shares during this time.

O'Keefe wrote a joke:

How to get 50x shares?

It's enough to hold 100 times the shares for a year!

In the midst of such intense fluctuations, O'Keefe has continued to hold Nvidia. Not only is it an excellent financial performance, but Nvidia is continuously expanding the scope of application of its GPUs (the addressable market is rapidly expanding) to fulfill its previous development promises.

It is also essential that O'Keefe continues to deepen his understanding of the value of Nvidia as a company.

Of course, the Nvidia myth is far from over.

On November 30, 2022, the latest version of ChatGPT was released, and it immediately took the passion for artificial intelligence to a new level.

Stocks are starting to double, then double again...

This is another important point about 100x shares: the real big gains are behind.

$Microsoft (MSFT.US)$,$Alphabet-A (GOOGL.US)$/$Alphabet-C (GOOG.US)$,$Apple (AAPL.US)$,$Amazon (AMZN.US)$Generative artificial intelligence is coming to an end. And what these companies all need is Nvidia's artificial intelligence chip.

In its financial report for the first quarter of 2023, Microsoft,$Tesla (TSLA.US)$Many companies, such as Google, have mentioned that Nvidia chips are the foundation of the artificial intelligence revolution.

This propelled Nvidia to become the 7th US company with a market capitalization of over $1 trillion in June 2023.

People are getting more and more enthusiastic. According to Barron's statistics, 86% of Nvidia analysts recommended buying the stock, 12% recommended holding it, and no one recommended selling it.

Undoubtedly, Nvidia is one of the best companies in the world and arguably has the best technology. Furthermore, it is the semiconductor manufacturer most likely to benefit from artificial intelligence.

O'Keefe, on the other hand, was in the minority who recommended selling Nvidia and lowered his Nvidia position. The biggest reason is that Nvidia's valuation is very high.

O'Keefe borrowed analysis from Howard Marx of Oak Capital to discuss investor extremes in a May 2005 memo:

“Investors tend to (a) ignore the lessons of past cycles, (b) get carried away by new developments, and (c) pile up high-risk investments under the guidance of clichés such as 'this time is different, ''high risk means high reward', or 'if it doesn't work out, I'll quit.'

In the past market cycle, investors have made many such logical mistakes, such as the real estate market when this Memorandum was written in 2005.”

And Howard Marx's review of high-price-earnings stocks in his latest July 2023 memo:

“History has proven that no matter how good a company is, as long as the price-earnings ratio exceeds 50 to 60 times, buyers should be careful. Proponents of overvaluation point out that these stocks have fantastic growth and good prospects.”

O'Keefe believes the excitement brought about by the AI revolution is amazing, and there is no doubt that Nvidia is leading the way. But that doesn't automatically translate into an increase in shareholder value.

Despite being confident about the future, now is not the time to let go of the lessons of the past. This is especially true when valuing the price of a business. We've been talking about artificial intelligence for years, not what ChatGPT ignited for us.

O'Keefe borrowed the first two sentences from Charles Dickens' classic “A Tale of Two Cities.” This is the best of times, and the worst of times”.

This is how he really felt about Nvidia: “Although Nvidia has experienced excellent growth in terms of revenue and profit, I no longer think Nvidia's valuation is reasonable.”

As a result, after receiving a 150x return from the initial investment in Nvidia, O'Keefe reduced Nvidia's holdings and reinvested the proceeds in other investment opportunities.

Good stories are often imperfect.

O'Keefe did not have All In Nvidia, and it also reduced its holdings twice during Nvidia's rise. In particular, the reduction in positions in 2023 caused O'Keefe to miss out on profits in the process of doubling Nvidia again less than a year later.

However, O'Keefe showed no regrets.

• First, O'Keefe still holds a large number of Nvidia positions, accounting for 21% of its total holdings.

• Second, after O'Keefe reduced its position, it invested in other growing tech companies, such as$Qualcomm (QCOM.US)$.

• Finally, and more importantly, O'Keefe's operations are in line with his investment methods; he doesn't seek to make all the money he can make. To borrow a famous saying from the investment community, it is: only earn money within your knowledge.

05. Some other gains

In the process of investing in Nvidia's 100x return, O'Keefe also had some very interesting summaries: Looking back, how easy it is for investors to get lost in the funny details.

• The negative factors he mentioned in his first memorandum include an increase of 170 basis points in operating expenses due to increased R&D expenses;

• Each review of a single quarter's data is insignificant except for a few key points;

• Undecided about expecting more or less profit;

• Talk endlessly about the recent good or bad performance of stocks;

• Macro discussions on the economy...

As you take a step back, all of this seems pointless as time goes on. In the face of a company that returns 100 times, it has its own distinct characteristics. These little quarterly updates aren't important at all.

Every business has a few key things to understand, which can be called the essence of the enterprise, the beating heart, the core engine... Being able to identify these key factors and focus on them is the key to success.

1. Stop emphasizing individual quarters, recent stock performance, profit forecasts, macro forecasts, etc.;

2. Think as if possible like a private owner of the business;

3. Look at the stocks you hold like real estate; this is something you plan to hold for a long time;

4. Finally, the “secret” to long-term excess returns lies in concentrating investments and allowing the portfolio to become “unbalanced” over time.

Market winners will bring a lot of money, but you have to let them play to the fullest. You won't be able to do this if you keep lowering your investments.

06. Summary

Everyone loves the myth of victory, and they also want to be one of the “hundred times the share” myth. But I think the great thing about this story is that O'Keefe's success is real.

• This is not an investment that can be recognized from the beginning to see Nvidia as a hundredfold return;

• The current huge development prospects are a process of continuous development, adjustment and gradual realization of the enterprise itself over a long period of time;

• Investors can continue to learn and constantly re-understand the company's values in the process;

• Also, being able to persevere in the process of profit and twists and turns

Finally, since this is a story about 100x return on investment, we'll summarize it with the core ideas of Mayer's book “How to Find Stocks That Return 100x”. The most important principle for finding 100x shares is the need to find a company that continues to have a high return on investment.

He summarized the essential rules for finding hundredfold returns:

1. You must use limited time and resources to find 100x stocks, and don't waste your limited energy on stocks that may increase 30%.

2. Grow, grow, grow higher. One hundred times the share means that it can continue for 21 consecutive years, with an annualized growth rate of 25%.

3. Prefer undervaluation multiples, which must be balanced between price and other factors.

4. A moat is a necessary condition. 100x shares require a high return on capital over a long period of time. A strong moat is a barrier to high profits for the company.

5. Do not invest in companies with large market capitalization. If you start with acorns, you'll harvest oaks; if you start with oaks, you won't reap the same amazing growth. Although not a requirement, searching for 100 times more shares in small companies is more likely than in large companies.

6. Prefer the founder to run the business. For nearly 50 years, the most successful companies have had a visionary, resilient, and capable owner: Steve Jobs, Jeff Bezos, Elon Musk, and Warren Buffett. Outstanding owner-operators help investors to strengthen their faith.

Knowing that talented owners and operators hold a large amount of shares and are also in charge of the company will make it easier for investors to firmly hold shares when the company is in trouble.

7. Great investments take time. Even the fastest hundredfold shares will take 5 years; the more common case is 20-25 years. Investors need to overcome their impatient nature and not have strong vertical impulses to “act” or “do something.”

8. You need good information filters. The act of focusing too much on the price and being overly nervous are pointless, and the urge to trade often leads to the wrong results.

Don't waste too much effort speculating on the future direction of the stock market. All you need to do is keep looking for good ideas.

9. Good luck is essential.

10. Be a person who doesn't want to sell. If you want to find 100 times more shares, then you must learn to maintain your strength and hold on.

Editor/jayden