Identifying and investing in multibagger stocks has always been a popular topic of discussion in the context of equity investments. The annals of stock markets are replete with folklore about how famous investors successfully identified and invested in multibagger stocks and made extraordinary returns.
The marketing pitches made by several financial service providers often include the claims of identifying multiple multibagger stocks at the “right time” and riding on these till the end.
Drawing inspiration from these folklores and claims, many investors strive to find multibagger stocks for investing. However, as the anecdotal evidence suggests, very few of them can actually identify and invest in such stocks.
It is also common to find investors lamenting that they did actually identify a potential multibagger at the right time, but either did not invest in it or invested an insignificant amount in it; or worst, exited their position too early with some gains (or losses).
Nonetheless, this fascination with multibagger continues to grow and has almost acquired the character of a cult.
Thousands of investors are constantly losing money, chasing this mirage. Some of them even get addicted to buying stocks like they would buy a lottery ticket, hoping to overnight multiply their money several times.
Piquantly driven by the fantasy of becoming rich overnight, they are not deterred by multiple failures and keep persisting.
If you are not a member of this cult, but still desire to own stocks that would go on to become multibaggers, it is important to understand a few basic things.
What is a multibagger stock?
Multibagger is not a standard term in relation to investment jargon. Apparently, the investment Guru, Peter Lynch first used it in his book One Up on Wall Street (1988) to describe the stocks that have given more than 100% return to an investor. A stock giving 100% return is called a two-bagger; a stock giving 1000% return is termed a ten-bagger, and so on and so forth.
The key points to note here are:
1. There is no fixed timeframe for a stock to qualify as a multibagger. A stock that yields a 500% return in five years (43% CAGR) and a stock that yields a 500% return in 15 years (12.7% CAGR) - both would qualify to be called multibaggers.
2. A stock could be a multibagger and a loser for different investors, depending upon the holding tenure of the respective investors. A stock that traded at ₹27 in 2020, rose to ₹135 in early 2022 and is now trading at ₹80. For the investors who bought this in 2020, it is still a multibagger; whereas the investors who bought this in early 2022 are facing a loss of one-third of their capital.
Thus, it is not the stock alone that is multibagger; it is the combination of stock, entry price and holding period – that give multibagger return.
3. Two investors bought a stock at ₹50 each in 2007. Investor A bought 50 shares, representing a mere 0.002% of his total equity allocation of rupees one crore. Investors B however invested 5% of his total equity allocation of rupees one crore and bought 1000 shares.
Both the investors are holding the stock in their portfolio to date and the current price is ₹12,000. For both the investors the stock is a multibagger, but for investor A it is a cause of constant agony and regret, and for investor B it is the primary source of his financial security.
Just to simplify our discussion, we may define a multibagger as a stock that has outperformed the benchmark index consistently for more than five years at least.
Could you plan a multibagger?
The odds of winning the first prize in the Kerala State Lottery are generally 1 in 90,00,000. The odds of winning any prize, which could even be less than the cost of the ticket ( ₹40), are 1 in 119. Obviously, it is almost impossible to identify the ticket that will win a meaningful prize and buy that.
There are close to 2000 stocks traded on the National Stock Exchange. Of course, the odds of buying a stock that will sharply outperform the rest of the stocks are much better than a lottery ticket if you choose a stock randomly. The odds would become much better if you pick a stock through careful and in-depth analysis, rather than picking any stock randomly.
Definitely, investing in equities is not akin to buying a lottery ticket. Nonetheless, planning a multibagger (e.g., a stock that would consistently outperform the benchmark returns for more than five years) is an extremely difficult task.
An investor could identify a sector of the economy that is likely to the next upcycle. He/she could even identify the companies that are likely to perform very well in that economic upcycle. But availing of that opportunity would need (a) surplus funds that could be invested for 5-10 years, (b) control over the sentiments of greed and fear to prevent early exit in case of a sharp fall or rise, and (c) adequate financial backup to preempt a situation where the investment would need to be liquidated under duress.
(The author is Director - Equal India Foundation
Disclaimer: The views and recommendations made above are those of the author and not of MintGenie.