A successful self trader – Rule # 21
You must be aware that certain stocks have turned up incredible performances over the years. Had you invested in the Infosys IPO, appreciation would have been 85 times in 6 years. TTK Prestige had moved from Rs.105 in 2007 to Rs.4500 in 2012. A relatively low profile Bharti listed and went down to Rs.18 in 2002. By 2006, it was quoting at a whopping Rs.900. How do you identify a multi-bagger?
THE SECRET BEHIND GRABBING THOSE MULTI-BAGGERS
Let me begin with an interesting anecdote of a rural investor in AP. Back in the 1990s, he had invested a tidy sum in an unknown company called Satyam. By 2006, his IIhad multiplied to a mind-boggling figure. I only wish he had exited in time, but the moral of the story is simple. We all wish that in our lifetime we can ride one or two such multi-baggers fully.
Look back at the past 20 years and the number of stocks that have given mind-boggling returns in a 5 year period is huge. Infosys between 1993 and 1999; Unitech between 2003 and 2008; TTK Prestige between 2007 and 2012; Eicher between 2009 and 2014, and the list can go on. But the lesson is that multi-baggers are available in all markets at all levels of valuation.
But how do you identify a multi-bagger? The star Fidelity fund manager, Peter Lynch, once said that you do not need to be a genius to identify a multi-bagger. On the contrary, keeps your eyes and ears open, start taking down meticulous notes from the world around you and, of course, keep your feet on the ground. If you are low on conviction, multi-baggers aren’t your cup of tea.
3 STEPS TO A CLASSIC MULTI-BAGGER STORY
It must be a market disruptive idea
Hero Honda in the 80s and Bharti later on, actually disrupted markets. They changed the way industry functioned. Such companies are most likely to be outperformers in the long run. But disruption, alone, is not enough!
Focus on a scalable model
A disruptive idea or product cannot go too far if it is not scalable. This is important because unless you scale, you cannot reach out to a large audience and hence you cannot supply at an economical cost. It remains a great idea!
Enter around the tipping point
This can be quite a subjective call. Bharti’s tipping point came when subscribers became networks. Infy’s tipping point came when it became a serious global player. Unitech had its tipping point when land bank values got re-rated. Hero Honda’s tipping point came when a great idea was married to great financing options.
“Know what you own but, for God’s sake, also know why you own them” – Peter Lynch
5 TYPICAL FEATURES OF MULTI-BAGGER STOCK IDEAS
- Most multi-bagger stocks are typically companies with low debt levels. If you look back at the history of stocks like Bajaj Auto, Hero Honda and Infy, they were extremely under-leveraged. High debt can implode when the business cycle turns around. Look at the case of how Unitech went from a multi-bagger to a wealth destroyer in just 2 years. Or, for that matter, companies in the overleveraged Jaypee group! Low debt is the key!
- Multi-baggers are typically found at the cutting edge of a new trend. Infosys made the best of the trend of outsourcing. Hero Honda was best poised to take on the trend of fuel-efficient bikes. Bharti actually invented telecom in India. Tata Motors grew with car pools and then with luxury cars. ? And Eicher was at the forefront of sturdy and rugged bikes!
- It is very important to focus on positive cash flows. We have already seen the perils of focusing on eyeballs in the case of internet companies and footfalls in the case of retailers. Any demand proxy that does not generate cash flows is pointless. Look at Infosys, Eicher Motors, Hero Honda and the global giant Apple. All are surplus cash flow generators. Forget eyeballs!
- Be wary of a huge equity base! We used to tell this story of Tata Tele Maharashtra. With over 500 crore shares outstanding, the company would have to earn Rs.500 crore in a tight, capital intensive industry to generate a Re.1 EPS. Valuations upsides were, obviously, capped. Also, lesser the institutional shareholding, it is better in the early stages for such stocks.
- A great multi-bagger is normally a great stock in a lousy industry. Great industries are too closely tracked. Watches were a boring industry till Titan came in. Kitchen appliances were dull till TTK Prestige came in. They made the best of changing consumer preferences, changing lifestyles, rising spending power and higher margins. Obviously, they outperformed!
HOW SUCCESSFUL INVESTORS USE THIS RULE
Successful investors like Warren Buffett and Peter Lynch have been extremely adept at identifying multi-baggers. If you go through their approach, it is predicated on 2 essential pillars. First, the multi-bagger stock should be a simple idea that can be illustrated with a crayon. Secondly, these ideas have to be futuristic; you can’t identify multi-baggers by looking at the rear view mirror. At the end of the day, it is not just enough for a stock to become a multi-bagger. It is more important that it stays a multi-bagger. Surely, unlike Unitech!
There are occasions in the economic history of a country, when almost the entire market is a potential multi-bagger. Look at the US and UK markets in the early 1980s. For that matter, look at Indian markets in 2002. Most mid-cap stocks and PSU stocks are up at least 50 times from those levels. These are, what we call, a once in a life-time opportunity.
TAKEAWAYS FROM THE “GRAB MULTI-BAGGER” DEBATE
The legendary Peter Lynch once said that the best multi-baggers were not just an outcome of rigorous research. They came from the stories and leads he picked up talking to dealers, talking to retailers, visiting malls, talking to college students and just overhearing conversations at the park or the mall. The next great multi-bagger idea may be just around the corner.
As Warren Buffet best summed it up, “Price is what you pay and value is what you get”. It is therefore essential that you reduce the price you pay and maximize the value you enjoy. Multi-baggers are not rocket science. As long as you focus on the process rather than the results, your next fabulous multi-bagger may not be too far away from you! Sounds Good?
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