Multi-bagger – A term coined by legendary fund manager Peter Lynch in his 1988 book “One Up on Wall Street”. It means the stocks that give returns several times of their acquired costs.
A raging bull market of more than a decade has made many companies a multi-bagger, as their stock prices multiplied several times, this has not only increased the wealth of the owners/promoters who were having the larger stake in the firm but also few fortunate minority investors who got invested for long due to xyz reasons, because if you ask any from promoter to minority investors none would have expected such returns.
One side there are investors/analysts whose quest for identifying and investing in such companies is unending, it’s a fun game for them they eat and sleep with it whether they find such companies or not but the hunger to find few goes on, on the other hand we have guys who appears and announce weekly a company to have the potential to become the multi-bagger in future and small retail investors believes and start following and investing in such companies despite knowing the fact no one is having future predicting abilities and if they had they might be into the astrology and not investing.
Continuous bombardment of multi-baggers name have made people believe that finding a multi-bagger is a recurring phenomenon and not a rare one, but one need to realize that very few people get lucky to identify such companies and even if they do, their multi-baggers also need to compensate the mistakes one has made during the course.
Peter Lynch says, while investing money, even if you are right 6 times out of 10 you will be considered excellent. So not all times you selected stocks will perform. It is only those few ten baggers that will compensate for the mistake.
If one asked in which bank he would have invested 10 years back in India, if they had the opportunity, one would proudly answer HDFC Bank, but if the same question was asked before the failure of “Yes Bank” (at one point in time, India’s fastest and fourth-largest bank), obvious choice would not be the HDFC or ICICI Bank but “Yes Bank” instead.
Hard to believe isn’t?. Look at the below stock price return chart of HDFC Bank vs Yes Bank. Who would have thought that year 2019, will completely wash away all the multi-bagger returns and outperformance till date of “Yes Bank” and will top the risk rating of RBI with highest 99 marks of 100.
Bull market is like ocean waves which takes higher everything along with it, all types of companies flourish in such times, stock prices make daily all time highs, IPO’s come at insane valuations but this is the time to act caution as Mr. Warren Buffet said:
“Only when the tide goes out do you discover who’s been swimming naked”
Humans from long having a tendency of forgetting events with time which makes them repeat the same mistakes again and again, history is full of such recurring human mistakes whether it’s investing in companies trading at insane valuations or companies involved in fraudulent activities like Manpasand Beverages,Vakrangi, DHFL, PC Jewelers or if they have to choose a political party in power to rule.
Please note above companies also gave multi-fold returns at one point in time and traded all time high, Manpasand Beverages was quoted as next Parle and no-one uttered a single words against them, we heard voices of caution only after their debacle and when these companies turned out to be totally duds.
Just if we go few years back, below were in the list of multi-baggers of 2015, few of them not even exists today.
Above examples shows long term investing can be devastating as well, exiting your profitable positions sometime takes away your future gain (which nobody sure of) but exiting at least leaves you with the actual cash on table.
By no means we are against the long term investing we firmly believe that huge money is made by the long term investors only but here we are just cautioning that believing some well researched company will turn out to be a multi-bagger could be a mistake as for every HDFC bank there are dozen banks who gave given negative returns till date but the quest of searching next multi-bagger by retail in the influence of few youtubers/twitter handles have only and only harmed them by supplying half truths, incorrect research, stupid logics, being impressed by the people promoting investing in micro/small cap the only way to make crores therefore look out for the companies which are hidden not tracked by masses, but here people miss out that person running the company is also hidden, If very less information is available about the micro company in public domain so about the promoter.
Retail investors should realize the fact that investing philosophy chalked by the greatest investor of all time Mr. Warren Buffett is the best way to navigate the investing world and one will be better served following the advise of the Oracle of Omaha as below:
-One that we can understand,
-With favorable long-term prospects,
-Operated by honest and competent people, and
-Available at a very attractive price.
Source: Insider
Best investments by Mr. Warren Buffet were done into the great companies like AMEX, COKE, BAC,APPLE, having core business model, run by honest management and at a time when these were facing the temporary difficulties and were available at very attractive prices. He always looked for the great established companies, companies which have seen difficult and pain full cycles and have survived those cycles and not the companies with no proven long track record. That’s why Mr. Buffet’s Berkshire Hathaway bought 5 percent stake in Apple, at the time when company had posted the lower revenues and was shrugged off by the main stream investor community, and then it was his turn who put in stake worth $36 billion in 2016, which is now worth $160 billion.
It’s an Irony that investors always disregard the Oracle’s advise and instead of buying HDFC bank or any other good company people look out for companies which would become the next multi-bagger, retail will be well served if he shifts his focus towards buying the great business in difficult times like the ICICI Bank in Kochar-Dhoot Saga, Nestle in the Maggi-gate, Bajaj Finance in the demonetization and probably some strong PSUs in the current situation, please note this is not a easy thing to do and take a lot of courage to act against the herd but looks very obvious in the hindsight and that’s why we always recommend a mutual fund as a preferred way to participate in the equities by small investors and advise to avoid such people who himself not invest in their recommendations of multi-baggers.
In last we would like to leave our readers with the below excerpt from the book The Intelligent Investor to ponder upon, if really multi-bagger can be sighted in advance or it’s just the outcome of investors due diligence, knowledge, hard work, patience, conviction and most importantly “luck” which often gets ruled out and doesn’t get the due credit it deserves.
Big fortunes from stocks have been garnered by those who made a substantial commitment in the early years of a company in whose future they had great confidence, and who held their original shares unwaveringly while they increased 100-fold or more in value. But the big fortunes from single company investments are almost realized by persons who have a close relationship with company through employment, family connection etc.-which justifies them in placing a large part of their resources in one medium and holding on to this commitment through all the vicissitudes, despite numerous temptation to sell out at apparently high prices along the way.
the intelligent investor Page:161-62
An investor without such close personal contact will constantly be faced with the question of whether too large a portion of his funds are in this one medium. Each decline-however temporary it proves in the sequel – will accentuate his problem and internal and external pressures are likely to force him to take that what seems to be goodly profit, but one far less than the ultimate bonanza.
Bright Fortnight Capital 