Tuesday, August 18, 2009

The futile quest for the mythical 'multibagger'

Legend has it that the Philosopher's Stone had the unique ability of turning iron and other base metals into gold - the ultimate 'multibagger'. For a long time, the quest for the stone became an obsession in western alchemy.

"Many many years ago, a man decided that he would give up worldly comforts and riches, and dedicate his life to finding the Philosopher's Stone. He set out on his quest with an iron chain in his hand. Whenever and wherever he found a stone, he would stoop to pick it up and touch it against the chain to see if it turned to gold or not.

Many days and months passed, but he never wavered in his quest. He became thin and his hair turned into knots and his beard became long and unkempt. But the desire in his heart didn't wane.

He travelled through many countries and continents, from the mountains to the oceans. Never did he stop to appreciate the beauty of nature all around him. With a piercing gaze he picked out every single stone and kept touching it to the iron chain to check if it had turned to gold.

After a few years, it started to dawn on him that his quest may never reach fruition. Out of sheer habit, he carried on and picked up stones and touched the chain with them. He started getting weary and his heart became heavy, and he no longer bothered to check if the chain had turned into gold.

Once he was passing through a village square, where some small children were playing. They saw this wild-eyed man in tattered clothes, knotted hair and tangled beard coming towards them. One of them exclaimed: 'Look, look! That crazy man is carrying a shining gold chain.'

The man stopped dead on his tracks. In sheer disbelief, he looked at the chain in his hand. It was a solid gold chain. During his long quest, he had found the Philosopher's Stone after all. But he had thrown it away, like all the others, after touching it to his chain without checking.

In sheer despair, he sat down and pondered his fate for a while. After some time, he sighed, got up and resumed his quest."

The moral of the story? It is the rare and fortunate investor who can find more than one multibagger stock in his entire investment career. Such good fortune happens more through chance than by design.

Why is that? Because most of us do not plan to hold a stock long enough in our portfolio for it to generate stupendous returns. Does it mean that holding any stock for a long time will automatically generate multibaggers? The answer is obviously 'No'.

That is why, selecting fundamentally strong stocks is so important. Once the preliminary hard work of proper stock selection is done, one should keep holding such stocks, and at most, book partial profits from time to time.

The trick is to keep buying back these shares during a down turn, at lower prices. Doing this with just a couple of stocks, like Tata Steel or L&T, can provide huge returns.

Can momentum, or 'fashionable', stocks provide multibagger returns? The answer is 'Yes'. Pantaloon and DLF have been multibaggers. But how many small investors were able to reap the multibagger returns?

My guess would be, very few. Most would have exited after the stock doubled or tripled. And the unfortunate few, who actually got the multibagger returns, probably held on too long and are facing losses now because of the steep bear market fall.

(Notes: 1. The above story is a prose version of a famous Tagore long poem, titled 'Parash Pathor'. Satyajit Ray made a highly entertaining movie with the same title, about a person who actually finds the Philosopher's Stone and what happens to him because of it.

2. I'd be very interested to hear from readers about any multibaggers they hit or missed.)

Related posts

How to pick Stocks for Investment - Part III
How to build wealth using a buy and hold strategy


Mitran said...

B L Kasyap is a multibagger for me, i bought at 97 an holding now also

Subhankar said...

Thanks for your comment.

Would you like to share - for the benefit of other readers - why you chose this particular stock, and what is your exit strategy, if any?

Eswar Santhosh said...

I have a different perspective to offer.

The crash of 2008 was no doubt severe. However, 4-5 years leading up-to it were spectacular.

Anybody who entered in that time period, irrespective of their talent, would have found one or more multi-baggers. As you know, rising tide lifts all boats :-)

For the newer investors with less than 5 years experience, I think the real test is now.

I had and still have my fair share of multi-baggers. I also had my share of 'multi-dragging' from multi-bagging stocks.

At this juncture, apart from the stocks I hold since the beginning, I do not know if I can repeat the performance with my fresh picks. If I do, I will write back here after the next bull market is over :-)

ekamber said...

dear subhankar ji

Your anecdote or rather the work of the Nobel Laureate Tagore ji is very very true, I for one has never been in search of a multi bagger but am left with 200 shares each of Shiv vani oil as also VBC Ferro alloys which have been bought by me more than two years back under 75, can not even reocllect the exact price, as you have said they are multibaggers for me by destiny

with regards

Eswar Santhosh said...

Just to add...

Thinking back, I did not pick any of my multi-baggers thinking about any manifold returns. Most of them were preferred for stability of returns (and regular dividends in some cases) than picking up for the sake of becoming multi-baggers.

Glenmark, Marico and surprisingly, even HUL (adding dividend returns) is a multi-bagger (min 3X). Strange! I had not even remembered them when writing the last comment :-)

As for multiplying money, in my earlier days, I even doubled money in the ever infamous HFCL. But it must be noted that I have actually lost more on the 'MB returns' promised by others in my equivalent of your "mad money" portfolio (approx 80% of all my losses in stocks). But, it has been more than compensated by the 'core' or 'steady' portion.

Mitran said...

As Eswar mentioned, since i entered in 2008 crash, it becomes multi bagger. It may be true also. it is good real estate and construction company with excellent track records of execution.

Right now,Sturdy industries and ramco industries(after bonus and split) are future multi baggers.

SG Money Mind said...

Infosys was a multibagger to me just because of sheer luck. The day when Atal Vajpayee's government fell after ruling for just 13 day's, I bought the stock. When my broker adviced me not buy, but I overuled him. After some time, I added few more shares and then sat tight on it for the next 5 years, before I sold it off for non-investment related reasons. Excluding all the dividends, the stock went through bonus issue and stock split. Finally when I sold it, it has zoomed to nearly six times.

The reason I say it was sheer luck because, I never used to read their annual reports which they sent diligently year after year. Nor I was aware of what to read from those reports.

Subhankar said...

@Eswar: You have confirmed my point that choosing fundamentally strong stocks and hanging on to them can give great returns.

Don't try to repeat performance. Just keep repeating your selection criteria. Performance will follow.

@Ekamber: Sounds like you've got unintended multibaggers! But neither of those stocks are financially strong. VBC's balance sheet is very weak - meager profits, and much larger interest payments. Shiv Vani's is a little better, but they are also under a huge debt burden.

@Mitran: For '07 and '08, BL Kashyap had increased turnover and profits. Their debt had also increased and cash flow from operations had turned negative.

Sturdy has tiny profits and increasing debt. One or two bad quarters can cause problems.

Ramco's balance sheet is a lot stronger, and the price is reflecting the bonus announcement. But they have huge debt as well - and have always promised a lot but delivered less.

@SGMM: So you got a multibagger 'by chance and not by design'!!

Madhu said...

Your suggestion of sharing multibagger stories is very good.
It will help everyone reading it.
I would also like to share my piece of information.
Two stocks the first one is Karur Vysya Bank.
It is a stock which I bought at par. They continuously give bonus and rights. I bought some 10 years back and today I have considerable lot of the shares. Dividend is also handsome.
REasons for selcting the stock: Not very aggressive bank (So doesnt go for high profit high risk business), consistently Low NPA generation, consistent and good dividend payment, catering to trade finance rather than project finance.
Whenever I am badly in need of considerable sum of money I offload part of my holding.

Would like to have your expert views on the stock.

Another stock which I selected few months back is NIIT.

Reasons: India has a favourable demography of young population, IT and other related education will be in vogue, company is proactive to enter new education areas to capture market, consistent performer (except for in between years when mkt becomes very very bad).
when the mkts started to fall I began to pick up the stock from Rs30 on wards and continued picking up till 14.80 (Lowest price was 14.30 in BSE). This was the time when entire world was expecting doomsday. I ignored comments that the price will touch Rs 6 (historic low adjusting for split). My average price was Rs 20.
I sold a third of NIIT shares few weeks back to take back my investment. Currently I am just trading in NIIT (There is clear possibility of Rs 5 fluctuation).

Would like to have your views on NIIT.
These are my multibaggers.
May be at some point of time I would like to discuss "MULTISAGGERS" - losers in my portfolio.

ekamber said...

@subhankar ji
thanks for the comments
@madhu ji
I wish to know more about the multisaggers also, I do not have any such experience, fortunately for me
with regards

Subhankar said...

@Madhu: Appreciate your inputs.

I don't track KV Bank - but a quick look at the financials suggests that this is a sound stock that you can keep holding.

Don't track NIIT either. After the dot.com bust and split into 2 different companies, the education division has never regained its previous glory. The stock looks overpriced.

@ekamber: You are welcome. It is my duty to point out what looks good and what doesn't. But it is your money at stake, so you are the best judge.

Mitran said...

Your comments are great. In this case, could you draft the Possible Multibagger irrespective of Market movement.(assuming there wont be spl bad news for the company)

Madhu said...

Just my thoughts on multi baggers:
1. It has to be caught during a trough - Many multibaggers caught at the peak of the cycle will give good returns but will not become multibaggers.
2. Multibaggers will always move with the market. In simple terms, do not expect it to move up when market falls.
3. It is never possible to catch at the bottom of the price. It has to be accumulated over various price levels (at every fall) and over a period of time.
4. It cannot be part of hot stocks at that point of time. for eg. today hot sectors are sugar and cement but unfortunately starting to buy today may not make it a multibagger even though it may give some returns.
5. Being a contrarian helps a lot in identifying a multibagger.
6. Consistent financial performance (may not be spectacular) is a must (Few intermediate dips due to macro economic situation can be forgiven)
7. Promoter track record of commitment to business is vital.
8. At low levels, most of the financial ratios may not be acceptable.
These are some of my views.
Would like to have your experience in identifying multibaggers.

Subhankar said...

@Mitran: Thanks. Wish it were that simple to identify multi-baggers! Please read my comments below.

@Madhu: Those are all valid points, that apply to fundamentally good stocks.

I don't quite agree with 2. If you look at the FMCG stocks, HUL in particular has been in a rising bull channel from 2007 - right through the entire bear market.

Comparatively risk-free multibaggers can be found by looking at dividend paying companies with lots of reserves that have a track record of offering rights and/or bonus shares. Most Tata group companies fall in this category.

Another way to 'generate' multibaggers is to do long-term trading in cyclical stocks.

Khambatta said...

Was good to read this once again. Thanks Subhankar.