Multibagger is the hottest term on Dalal Street these days. The years 2013 to 2015 saw small caps and mid caps create tonnes of wealth for investors. But with every tom, dick and harry stock making money for investors due to the huge inflow of funds (Thanks to low interest rates globally), it has made the investing community think that they have found the holy grail for making money by investing. As Bill Gates once said -
Success is a lousy teacher, it seduces smart people into thinking they can't lose
Value investing has become a cool term, just like "Start-ups". In an era where everyone claims to be a value investor, puts up articles about Warren Buffet's secret strategies and shares gyaan on intrinsic value, we are forgetting what value investing actually is all about! To start off with, buying stocks which are going up every other day, trading at 52 week highs or at all time highs and are witnessing a good rise in sales and profits is not a value investing strategy always! It is growth investing. You are investing on the basis of growth. Most value investors have no knowledge of the intrinsic value of the company is, they have invested assuming that the company's financials will continue to get better and better every quarter and they might end up with a 2 bagger or 3 bagger in their portfolio. What are the important things to keep in mind while chasing multibaggers?
1. They Are Rare
Yes, multibaggers exist. No, they are not easy to find. From a universe of more than 7000 listed companies, only a handful truly go on to become multibaggers. It's like a game of Tambola, a game where the odds are definitely against you. Why do you think the world's best investors make only 20% to 22% in the long run? If these geniuses can't find stocks that grow 2 times or 20 times every single year, how can we do it?
No one would touch a diamond if it was in it's raw form, except someone who knew what the stone really is. Similarly, no one will buy a company that's in doldrums and is turning around - The real multibagger. No one, will buy a company which is trading much below it's intrinsic value and there is no big fund or big investor holding it in their portfolio. It's simple, not all of us have the knowledge of the true intrinsic value.
3. Compounder vs. Multibagger
A compounder is a multibagger few years down the line. But people won't consider it a multibagger because it doesn't double in a year. How do you describe a multibagger? A stock which doubles in 3 years is also a multibagger! It doesn't have to double every year.
4. Test Of Patience
A true multibagger will test your patience. It might do nothing for 3-4 years and suddenly shoot up 500% in a single year! Stocks like Lupin, Titan, etc went nowhere for many years before becoming the poster boys of Dalal Street. Will you ever hold a stock that is not giving you any returns? You need to be patient and patience has to be backed by conviction. This is only possible when you have done your homework.
Both value investing and growth investing can help you find multibaggers. And both come with their own set of Risk.
|Value||- Stock won't move for many years
- Calculation of intrinsic value was wrong
- Trigger of value getting unlocked failed
|- No returns
- Opportunity cost is very high
- Frustration leads to wrong investments
|Growth||-> A fall in growth rate can send the stock price crashing
-> Tough to predict period of high growth rate
-> Growth stocks are usually expensive
|-> Big financial losses
-> Erosion of portfolio
Raghav Behani is a qualified CA and India's youngest SEBI registered Research Analyst. He is the founder of http://www.dalalstreetbulls.com an independent equity research firm.
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