Fake Multibaggers!

Last Updated on March 4, 2020

“We can pick multibaggers. Subscribe to our services and get MULTIBAGGERS” – Tom, Dick & Harry

Looking at the current scenario, there seems to be a slot machine game being played on the bourses. Any Tom, Dick or Harry in some corner of the country thinks he is skilled enough to spot multibaggers! Since all the stocks are moving up, there are high chances that all the recommendations will work. This means that ‘Luck’ is predominant in stock picking. Ones who are getting thrilled are forgetting what if the tide goes out? What if they held on to their investment and market went belly up? Do they have strong conviction to hold on to those stocks for long term or may be till next bull market? Seems unlikely!

“Only when the tide goes out do you discover who’s been swimming naked.” –Warren Buffett

People usually overestimate their stock picking ability in bull markets. That’s human nature since your belief is instantly validated and rewarded. What they forget is that they are probably fooling themselves. Their naïve research and lower conviction is getting strong due to bull market’s euphoria. Their stocks are going up multiple times. New phrase has gripped the market: “Multibaggers”. Everyone wants ‘Multibaggers’. Certainly, greed is good. But how much is enough?

One should ask how consistently one can do that? As we know, compounding works only over long term. One year 100% return is ugly in comparison to 20% return for consistently compounded over 5 years. In an urge to spot short term multibaggers, people tend to ignore long term investment returns.

Someone who is aggressively exploring multibaggers forgets that such stocks are rare, really rare. The buck doesn’t stop at just identifying such opportunity; one also requires a temperament to hold these stocks for years together. People are terrible at sitting and doing nothing for long time. They constantly seek activity. Unlike in bull market, such stocks take time to perform. After all, the stocks reflect value of underlying business.

Again, when one has identified such growth in stock, he should have strong conviction in his idea and allocate a significant portion of his portfolio to the stock. However, people tend to get impulsive and jump into the multiple stocks so as not to miss the opportunity. This behavior lacks conviction and makes them allocate small portions of their portfolio to multiple stocks. Few bets turn sour. Let us say if 2-3 stocks bear fruit, they will not yield more than average returns on overall portfolio as such stocks formed only 3-4% of the portfolio.

An investor who is holding a portfolio of 10-12 good companies with potential 15-20% annual returns over foreseeable future can beat the returns of a ‘probable’ multibagger.

A rational investor should do intense research of company and management, analyse industry growth, competition intensity within the industry, adjust price for margin of safety due to risk and uncertainty in the market. He should have confidence in his analysis and allocate a significant portion (8-12%) of the portfolio in each of those stocks. Also, one should ensure that he holds 10-12 companies across different sectors. Hold these stocks for long term and make movements only when necessary. Ensuring these parameters, one can earn consistently and beat the market year after year.

Devoting time for this process is more productive and truly rewarding rather than paying heed to noise in the market about ‘Multibaggers’.

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