The Most Important Thing to Look for in Multibagger Stocks

Years ago, a 19-year-old student stumbled upon a book on investing. So, impressed he was with this book that he jumped on a train to meet the author. Knowing that the author was a professor at Business School, he signed up for his class.

By the end of school year, his admiration for the author, now teacher, had only strengthened. So much so that he offered to work for the author's investment company for free. He was rejected initially. But his persistence paid off.

Four years after reading the book that would redefine his life and of millions of others, he was taken under the wings of his mentor.

He applied the learnings in the following years to his investments which made him one of the richest men in the world.

By now you must have guessed that I'm talking about Warren Buffett, who considers 'The Intelligent Investor' by Benjamin Graham his bible. It changed his life.

In his initial years, Graham was the key influence on Buffett's investing decisions. Later, it was Munger who shaped Buffett's decisions to buy.

With Munger as a partner, Buffett opened up to the idea that a great business at a fair price is superior to a fair business at a great price.

But do you know who he considers his guru when it comes to lessons in management?

Tom Murphy is relatively a lesser-known name to someone new to investing. But he is the man (along with his partner Burke) on whom Buffett made his biggest bet. He put not just his money, but his reputation behind the two.

When Capital Cities, a small but growing media firm of Murphy and Burke, took over a much larger American Broadcasting Company (ABC) in 1985, it was Buffett who lent the much-needed capital.

It was the biggest non-oil deal in corporate history at the time.

Murphy, it seems was a shy man. He never wrote a book or gave speeches. Most of what you would learn about him would be from people who knew and admire him and like to quote him often.

I got to know about him while reading the book: The Outsiders - Eight Unconventional CEOs and Their Radical Blueprint for Success.

At that time, the deal shocked the media world. The Wall Street Journal ran the news with the headline "Minnow Swallows Whale".

But here's an interesting anecdote that will give you a real clue about him.

At a TV station, revenues are mainly supported by advertisements. Hence revenues are inherently volatile. To stay profitable, a cost focus is must.

Murphy was a master in frugality. He was even conscious about the expense on office building paints.

When asked to paint the building that housed the studio to appeal to the advertisers, Murphy painted the two sides facing the road. The other sides were left untouched. As if to remind himself of the discipline, he made it a point to keep the picture in his office.

He also had a disdain towards a hierarchical culture, so typical of big corporates. He believed in hiring the best people and leaving them alone, making business processes both time and cost efficient.

This was well expressed in the following lines in the annual report of Capital Cities:

Decentralization is the cornerstone of our philosophy. Our goal is to hire the best people we can and give them the responsibility and authority they need to perform their jobs.



All decisions are made at the local level...We expect our managers . . . to be forever cost conscious and to recognize and exploit sales potential.

He also made sure that cost consciousness becomes a part of the company's culture.

Here is an excerpt from The Outsiders...

ABC, in fact the whole broadcasting industry, was a limousine culture. One of the most cherished perks for an industry executive was the ability to take a limo for even a few blocks to lunch.

Murphy, however, was a cab man and from early on showed up to all ABC meetings in cabs. Before long, this practice rippled through the ABC executive ranks, and the broader Capital Cities ethos slowly began to permeate the ABC culture.

When asked whether this was a case of leading by example, Murphy responded, "Is there any other way?"

In his words, his goal was not to have the longest train, but to arrive at the station first using the least fuel. And he certainly did a good job.

10 years after the acquisition of ABC, Murphy (without any apparent successor) managed to sell it to Disney for 5 times the amount he acquired it.

A Phase One investor who would have invested Rs 10,000 on Murphy in 1966 when he became CEO, would have made around Rs 2.1 m in less than 30 years. That amounts to compounding your money by nearly 20%, every year for 29 years.

No wonder Buffett was impressed. When asked by the author of a famous book - Berkshire Beyond Buffett, about who should pen the foreword to the book, pat came Buffett's reply - Tom Murphy.

He further added:

Most of what I've learned about management, I learned from Murph. I kick myself because I should have applied it much earlier.

You see, for successful investment results, one thing that is most critical, and at the same time, most tricky to assess, is management quality.

This is truer for small-cap companies as compared to their larger peers. That's because while bigger companies can run on the auto pilot mode, the management of small-cap companies is a critical make or break factor.

Also, to spot such managements, we need to interact/meet with them. I believe it's often small details, unconscious gestures or statements rather than their talk on media channels or interviews in the financial dailies that reveal the true person.

For instance, you will find a lot of managements talking big about cost consciousness, adopting fancy Japanese Six Sigma practices, hiring a prestigious consultancy firm (and paying them crazy amount) for suggestions on cost savings.

The same managements, however, can be seen making an obscene amount of expense on areas that will do nothing to improve the firm's productivity.

This includes setting up offices at the poshest locations, lavish office interiors, obscene expenses during AGMs and analyst meetings. In short, practicing limousine culture.

Companies like Kingfisher were victims of such a culture, leading to the downfall of the entire empire.

It may seem like I'm nit-picking, but for smallcaps, these seemingly random details are quite telling.

I can't resist mentioning that I have met a promoter who made it a point to switch off the light and AC while leaving the meeting room, once my discussion with him was over.

I have been to smallcap analyst meetings where the management speaks from the same elevation (not even podium) and all one is served is tea. This is contrast to some lavish meetings organised with much fanfare that offer 5-star experience.

I was once a part of such meeting. Ironically, cost consciousness of the company was repeated multiple times during this meeting.

It's the small things that give you big clues whether the management tends to walk the talk.

When we made the big bet on 'Crorepati' small-cap stock, it was the conviction in management intent, wisdom and execution skills.

I must say there is no way we would have developed this conviction if I did not have a chance of meeting and interaction with the promoter. The stock is up over 600% and still going strong.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure

PS: Get the details of my top 3 stock recommendations for 2023 by clicking here.