The Snowball Effect

This blog is about our understanding of the term "multi-bagger" and how one should look at multiplying their wealth through multi-bagger way.

Disclaimer: This blog is not a recommendation to buy / hold / sell any stock. This blog is mainly for information and educational purpose only. The intention to share write ups on this blog is to create a repository of ideas so that investors / visitors on the website / blog can have a look at various frameworks & approaches. Please read the detailed disclaimer at the bottom of the post.

The fanciest term heard in the stock market is multi-bagger, with most people having a desire to keep such possible multi-bagger opportunistic stocks in their portfolio. This term is also heard whenever we ask for a price outlook on any investment idea that one recommends; everyone imagines their stock to be a multi-bagger. While multi-bagger returns are a concept in investing, most of us just have a big fancy around this term, with very little or no inclination towards understanding the purpose and objective out of it. This blog will help you understand how to achieve multi-bagger returns.

Define multi-bagger:

Multi-bagger is defined as something that moves up in multiples i.e., not 30-40% up but say 2x-5x-10x-20x. To put it in a simple way, multi-bagger stocks are shares that generate returns of over 100% of the initial capital. A stock that gives twice the returns is called a double-bagger, and one that offers 10 times the returns is called a ten-bagger. There is no limit on the returns an investment can generate and we have seen many such instances in past. Hence, the journey of your existing capital to multiple returns is called a multi-bagger.

Having said that, multi-bagger returns within a specific time frame is very crucial for giving it its meaning. 5x returns over 10 years means a 17% CAGR, similarly a 5x returns over 5 years means a 37% CAGR. This is the most crucial definition of multi-bagger. Multi-bagger investments are those that give above average CAGR (say >25% CAGR according to us), which ideally helps to lift the returns on other diversified assets which might be yielding less.

Purpose of a multi-bagger:

Why does one need a multi-bagger? Multi-bagger is one of the tools needed to achieve the desired investment returns and investment objectives. Multi-baggers have to be looked as one of the weapons that give a fillip to your blended portfolio returns. Once you have understood the basic meaning of a multi-bagger, we need to understand why we need multi-baggers in our portfolio:

• To give a push to CAGR / IRR on blended portfolio
• To compound wealth
• To reduce the time frame to reach our investment targets earlier

Purpose of finding a multi-bagger or dealing with it, has more to do with improving returns on overall wealth, and not just looking at the multi-bagger idea in isolation.

How to achieve multi-bagger objectives:

Before understanding how to achieve multi-bagger objectives, we should understand how many different types of multi-baggers exists and what is their distribution in the entire universe of stock options that we have. Below is our estimate of how the entire stock market would move on the upside:

i.e., 1% of the stocks would give you 50x returns, 5% of the stocks would give you 10x returns, and so on. Each one of us first has to accept the fact that not many stocks are going to flare up 5x-10x-20x, and hence it is important to draw a conclusion about the expectations to be set in, while dealing with a multi-bagger.

Taking lead from the above, objectives of achieving multi-bagger returns can be achieved through a variety of ways as under:

• You have an option to ride on any bucket (within the above pyramid)
• Rs.100 investment *50x = Rs.100 investment *2x*2x*2x*2x*3x
• 10x-50x investments are on the top of the pyramid which means they are not easy to locate. Further, once you have located, you must have the conviction to hold throughout the entire journey of it being a multi-bagger.
• Alternatively, 2x-5x investments are ample in quantity and comparatively easier to locate. Repeated successful investments of 2x-5x can be achieved such that you reach the same destination in same time
• While luck is an important factor in investing, it is more so true for getting hold of a 20x-50x multi-bagger beyond the research that you do to hunt it.
• Conviction of putting in more money will always be there in a 2x idea as compared to a 20x idea, because of inherent risks attached to the latter idea. This way your original capital put to work can be way more under the 2x method, which can amplify the wealth.
• Also, multi-bagger through a 2x way increases the probability of reaching the destination target.

Our opinion and experience say that multi-bagger objectives should be scouted for through achieving more smaller successful investments than going only for the big punt. Hence with this, we set the perspective of multi-bagger objectives right.

Formula for a multi-bagger investment:

We discuss few traits that one should have while dealing with a multi-bagger. These traits are extremely necessary:

• Rome was not built in a day: Patiently holding on to your investments throughout the time frame because 20x returns @25% CAGR get achieved in 13 years
• Not exiting the investment too early on any quick gains
• It’s usually a lonely journey as these stocks are mostly un-discovered
• Probably you will have to be a contrarian to unearth such opportunity
• 20x-50x stock idea will be extremely uncommon, hidden and a microcap; no one would be talking about it
• Dealing with uncertainty about the prospects will keep bothering you all the while
• A journey to any multi-bagger will see a drawdown of 30%-50% at any stage, whenever market corrects. Holding the nerves is the key
• Continuous monitoring the fundamental strength of the company is crucial

Also, we now tell you some recipe for finding a 20x-50x multi-bagger opportunity. Some brief observations that we have:

• Obvious ones like:
• Existing size of the company must be small
• There must be growth triggers and company should have plans to grow their volumes
• Prices of their products should also increase whenever they are able to command those brand realizations
• Improving returns
• Ambitious and experience management who has seen at least one bad cycle in the business
• Good corporate governance
• Margin expansions can be achieved due to rising volumes and cost competitiveness with scale
• Ability to foresee the growth in the company say 5 years down the line
• Ensure you don’t pay anything for all this enthusiasm (not in the price when you buy); rerating also amplifies returns big way
• Catch some big trends a little early: change in the consumer patterns, environment issues, Govt. thrust, substitute for any product, etc.
• Non-cyclical businesses
• Business will flourish only when the underlying sector flourishes
• Business should not be dying (not a sunset sector). In fact, it should be a sunrise sector

While the above ingredients are necessary for a 20x-50x opportunity, it is true for even a 2x-5x opportunity. Further, in addition to above, we would like to add some key points to find 2x-5x investment opportunities as under:

• Cyclicals are one of the best options if timed well; bad timing will lead to stress though
• Sectoral rotation plays can be considered
• Some themes:
• Deleveraging play
• Operating leverage play

• Use of leverage tools can also be considered

With all the factors mentioned above, it is necessary to inculcate these practices in the job of investing. Any sort of ignorance about the stock or business will only lead to weakening conviction which affects the investing performance.

Common mistakes to avoid:

Many investors have held many stocks as perceived multi-baggers, but the truth of these investment has been otherwise. This is because of mistakes that an investor does which deprives the investment from being a multi-bagger in addition to adding undue risks. We try to collate such mistakes as under:

• Misconceptions that only penny stocks or low-priced stocks can be multi-baggers: Many investors hold a lot of penny stocks
• Urge to buy controversial stocks
• Don’t follow stocks ideas bought by someone else
• Tips will lie
• Investing mindset that only 100% of the investment can be wiped off with a upside of 5x-10x is always detrimental to wealth
• Lower allocations / no meaningful allocations leads to low impact outcome
• Daily watching of prices or expecting prices to move quickly can result in only disappointments

Process to experience a multi-bagger is a disciplined one, and hence it is extremely important to avoid the mistakes as noted above.

Risks associated with multi-bagger:

When you deal with a multi-bagger investment, there are some risks (in additional to normal equity risks) to your investment which are highlighted as under:

• Blind investments (not knowing the investment well) can lead to erosion of wealth
• Not taking exit from investment idea that is surely NOT to play out.
• You may lose whatever returns on your investment, if you are adamantly holding it for just getting more out of it.
• Urge for multiple returns may results in over allocation which adds to risk
• Portfolio full of perceived multi-baggers is a risk since it breaches capital allocation policies

When you are aware about how adding multi-baggers can backfire, is when you will consider the above factors.

Key points to keep in mind before investing in multi-bagger:

Reading all the factors till now and based on our experience, following key points are very important to follow and keep in mind whenever you are dealing with a multi-bagger investment opportunity:

• Don’t bet based on borrowed conviction, because someone else’s conviction will lead to more emotional decisions.
• There are indeed few “buy-and-hold” multi-baggers; so, don’t expect your investment to be it. Find a strong reason as to why it will happen. Hence derive conviction.
• To bet big you need to have you own conviction on the stock which will have several reasons and triggers to be a probable multi-bagger.
• Concentrated investments with decent allocation which is put to work (through this multi-bagger strategy) will lead to overall ballooning of your wealth.
• Don’t run searching for a 20x-50x; they will happen when they have to. Go searching for those 2x opportunities.
• Keep reviewing your investments and hold onto your winners. Sell only if there is any strong reason to. Not selling will only lead to a multi-bagger.

Summary:

Always think multi-baggers as tool to only uplift your returns; they are not used to reduce any risk (in fact they add risks). This can be done through numerous ways as discussed above. The idea of multi-bagger investment sounds very fascinating at first, but identifying the potential ones and holding on to them during their good and bad times both, is a hard task. The general observation we have on successfully bagging a multi-bagger is knowing, waiting and acting when the moment is right. Be very clear about what your multi-bagger objectives are, and then go hunt for it: after all, the next big multi-bagger idea may be just round the corner!

Thank You

Authored By Archan Pathak

Moderated by Jeet Gala

Jeet's Twitter

Jeet's Linkedin

Source of the data:

Some of the data used in this blog is created by Centra, while some data may have been fetched through various websites, content, files, brokerage house notes, etc. available freely on the social media.

Disclosure:

The information herein is used as per the available sources of exchanges, company’s annual reports & other public database sources. Centra Advisors is not responsible for any discrepancy in the above-mentioned data. Investors and readers of this blog should seek advice of their independent financial advisor prior to taking any investment decision based on this blog or for any necessary explanation of its contents. The blog is based on personal opinions & views of the author. Readers are responsible for all outcomes arising of buying / selling of particular scrip / scrips mentioned here in. This report indicates opinion of the author & is NOT A RECOMMENDATION to buy or sell securities. Centra Advisors & its representatives may or may not have any vested interest in above mentioned securities at the time of this publication. Centra Advisors, or it’s associates are not paid or compensated at any point of time, or in last 12 months by any way from the companies mentioned in the report. The views expressed in this post accurately reflect the authors personal views about any and all of the subject securities or issuers; and no part of the compensations, if any was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.