Saturday, August 1, 2009

Investment Prudence and “Multi Bagger” Concept

Investment in Stocks has been increasingly becoming very popular and one reason that everyone invests in stocks is to make money in multiples or at least better returns than any other form of investment. But do they end up getting that “dream” return in their investment? Yes and No. Some people do and some don’t. Investors who are very prudent with “stock market” patience usually complete the race while people who just come with expectation of making in millions by investing in mushrooming “Multi baggers” or doing futures and derivative trading, end up as a sorry figure. Stock investment can be compared to a Marathon rather than 100 meter dash.

Though I have not made in millions, I do feel that my investment has generated decent returns and more importantly, I have not lost single penny during one of the most difficult investment climate in history. From my experience, there are three important things that influence the “health” of a stock market investor. What are they?

1)What price you paid for the stock?
2)Which company or stock you have bought?
3)How many of the same stock you bought?

Investment Prudence

The price you pay for the stock is the single most important factor that not only decides your short term return but the long term success as well which is why I have mentioned it first. Why? Simply because, if we buy, even a average stock at a dirt cheap price, there is a chance to end up getting a decent return. But if you buy a great company at an exorbitant price, then you have dug a grave for yourself. But to be successful in stock investment, all three has to be in harmony with each other and may be that’s the reason Warren Buffet has mentioned I quote

“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price” and “Wide diversification is only required when investors do not understand what they are doing”.

Real Example:

Investor Name: Rakesh Jhunjhunwala.

First Big profit stock: TATA TEA

Price paid for Tata Tea: Rs.43

Selling Price: Rs.143

Number of Shares: 5000

Profit Made: 5 Lakhs (715000 – 215000)

Duration: 3 months

My Experience

I actually had a similar experience recently but I have not made 5 lakhs simply because of the third reason (How many bought).

Investor Name: Myself

First Big profit stock: YES BANK

Price paid for YES Bank: Rs.42

Current Price: Rs.160

Number of Shares: 500

Current Profit (Still Holding): Rs.59, 000 (80000 - 21000)

Duration: 4 Months

Hope you see what difference the number of shares makes. So, all I want to mention here is not to go for too much diversification. If we find good stocks at a great price, we should buy it in huge quantities without even flinching for once. Had I bought 5000 shares of YES Bank, I would be worth 8 Lakhs from YES Bank alone. But I failed to take that extra risk which now gave me a lesson and good experience.

Had investors applied the above three things in the last 1 year period, I am pretty sure they could have found many “Multi Baggers”.

The concept of “Multi bagger” has been misinterpreted by many people. I read many articles where Small Cap stocks with good business potential have been mentioned as “Multi Baggers” and that’s where I beg to differ. Multi baggers can be found among large and midcaps as well.


Multi Bagger

By definition “Multi Bagger” is a stock that goes up in price multiple times of the initial investment. So, if we apply the definition as it is, then almost half of the big companies have been the “Multi Baggers” in this recession leading up to the current rally.

Example:

GRASIM: The price of GRASIM when the SENSEX was around 8000 in 2008 November - December period was Rs.831 and current price of the same stock is Rs.2740. It has appreciated more than 3 times.
BHEL: Rs.1000 to Rs.2300, 2.3 times appreciation.
Educomp Solutions: Rs.1400 to Rs.4100, 3 times appreciation.
Aban Offshore: Rs.250 to Rs.1050, 4 times appreciation.
Axis Bank: Rs.300 to Rs.900, 3 times appreciation
Asian Paints:Rs.700 to Rs.1415, 2 times appreciation (Defensive Stock)
Tata Steel: Rs.150 to Rs.460, 3 times appreciation
Sterlite Industries: Rs.170 to Rs.650, more than 3 times appreciation
ICICI Bank: Rs.255 to Rs.760, 3 times appreciation
Jaipraksh Associates: Rs.50 to Rs.250, 5 times appreciation

So, the notion that “Multi Baggers” are found only among small caps is wrong and I hope I have provided ample proof for that. In the above 10 examples, I have purposefully left out small caps and even if we take small caps into account, not many small caps have appreciated as much as what I listed above. Hence, I strongly feel that any stock that fits into the definition of “Multi Bagger” should be considered as a “Multi bagger” and my suggestion for retail investors is to practice the three things that I mentioned in the first section which will give an opportunity to find less risky “Multi Baggers” from the pool of large caps. Only thing is investors need to grab the opportunity that "Mr. Market" presents.

Your sincere comments and discussions are invited.

Kumaran Seenivasan
http://www.stockanalysisonline.com/

12 comments:

cyril August 1, 2009 at 1:53 AM  

pls give some list of multibaggers at current level thanks cyril pinto

jamesvaikom August 1, 2009 at 2:13 AM  

Sir,
You are right that large cap stocks can also become multi-bagger. But only few large cap stocks will become multi-bagger because all sector will peak out some day.

During last bull run telecom stocks performed will because people stopped using land line and started using mobile. But as now most people are using mobile, there will not be much growth in this sector in future. But stocks like airtel and rcom will give decent returns in future because they will get more revenue from 3G and DTH. But the growth will not be high as in past.

I don't think sales of vehicles will increase much because most of us are having vehicles. But if some company introduce electronic bikes which automatically changes gear according to the road conditions, that company can become multi-bagger.

So my point is large cap has less chance of becoming multi-baggers but they are more safe. Most of the small cap stocks are not safe but some of them will become multi-bagger. I am sure that houses which have calling bells now will have CCTV and other security equipments after 10 years. But I am not sure whether companies like zicom or enso will not vanish in next 10 years.

Madan Kumar August 1, 2009 at 3:38 AM  

Dear Kumaran,

It is very surprising that you have exactly posted what I pictured as multibagger. I am new to stocks, just 2 to 3 months young right now. But I was able to see enough people calling small companies alone as multibaggers. "Risk is more in the price you pay, than in stock itself" - at least I believe that. Hunt for multibagger may be disastrous because the chances of failure there is very higher. I completely believe in value investing at least till now, as almost all the investment books that focused on value investing, which I have read till now, were able to convince me, and sounded too logical.

At the same time, I differ with anti-diversification point that you made. Diversification may not be needed for highly talented investors, and those who have access to inside information of a company. For most of us, who are laymen, without any big access to the company information, should always diversify. It is very practical for us to have missed something in our analysis. Also, what if the only company you invested in is found to have done accounting fraud as in the case of Sathyam?

Thanks,
Madan Kumar Rajan

Kumaran August 1, 2009 at 7:26 AM  

James,

I do not think that you understood my point here. I agree that companies become saturated. But even saturated companies can become multi baggers if you buy at the right price. Stock price is one thing that fluctuates all the time and it gives you enough opportunities. I have provided ample evidence of that by listing 10 big companies. Take the case of SENSEX stocks and calculate the appreciation from March 2009 and you will see that most of them appreciated at least twice. Hence, it is the price that you pay decides whether a company is a multi bagger or not. To be clear, if a stock appreciates two times or more from its original value at any point of time should be a "Multi Bagger". In that sense if you grab the opportunity that Market presents,then "Multi Baggers" are at your door step rather than in the so called "Hidden Gems". If you want me to be more clear, there will be a situation in future where market would decline 40 % or so. That may be in another 5 yrs or 6 yrs or 10 yrs.Grab that opportunity and invest may be 20-30 lakhs and you will see that most of the large caps giving you the returns in multiples and hence"Multi Baggers".

Kumaran.

Kumaran August 1, 2009 at 7:33 AM  

Madan,

Thanks for your comments. I did not say diversification is bad but I said not to go for "too much deversification". Please refer the article for that. Because, I have seen many people including me investing in more than 25 stocks which reduces the overall returns. Even if we deversify, maximum amount should be allocated to the best 7-8 stocks in the portfolio. If we invest equal amount of money in 25 companies, that will never give you great returns.

Kumaran.

jamesvaikom August 1, 2009 at 9:15 AM  

Sir,
I do understand your point. The problem is I failed to add my main point. Multi-baggers are stocks which give more than 100% returns. High beta large cap stocks will give multi-bagger returns if we invest at right time. But there are lot of stocks which gave more than 100 times returns( not possible in few months). So even though stocks which give more than 100% returns are considered as multi-baggers, many of us are considering stocks which give more than 10 times as multi-bagger.

You got multi-bagger returns from yes bank because you invested near 52 weeks low when news channels where discussing about NPA and not about cheap valuations. Going against herd is important to make multiple returns. Hope you will find more multi-baggers in future.

Shabu's August 1, 2009 at 12:30 PM  

Dear Kumaran,

Great one...Nice of you for the post as well as for sparked such a healthy discussion. I agree with most of your points but...

James is right in other way when it comes your own point.. "How many of the same stock you bought".

As you specified, the concept, voluem of income is closely related to voleum of purchase. In your case, if you bought 10000 of Yes Bank even @100 levels and sell @160, the returns could have better. so, Buying high numbers of any stock means you have to put more money which the common ivestor can't. Buying high numbers of large cap stock is more complex for the common investor. So the case, people search for Multibaggers in Small/Midcap stocks more related to the aim to increase in the numbers they buy, which I think is the better way to multiple our income.

I can translate the multibagger concept something like...

A garden of matured 10 mango trees will give us enough fruits, but if we have 1000 healthy saplings, we can dream better.....

Hope your getting my point, Please correct .if I am wrong... as I repect you as a professional in this subject.

warm regards

Ajay August 2, 2009 at 1:20 AM  

Although I cherish the idea for small-midcap gems which can multiply >10 times and I have most of those stocks in my portfolio; there is always bigger risk then estimated.

Now what are the risks for these kind of stocks? Becoming obsolete (because general time-frame is higher), lack of execution, wrong choice and lack of inside information.

For me, biggest risk is not anticipating competition. Generally, if any concept is successful; large companies will come in and with their might of cash they will take over major part of market chunk. And, that risk is generally not anticipated.

So, both points (large cap multi bagger and small/mid cap multi bagger) have their own merits and it's on investors profile or appetite to choose stocks accordingly.

Here is one more thought: Generally large caps or even mid/small caps becoming multi baggers in small duration (say <6 months) can be termed as momentum trade. So, you have to estimate more of technical factors rather than fundamental or value-buying factors to benefit from this.

Vijay August 2, 2009 at 12:32 PM  

Kumaran,
As usual very good analysis... :) I did exactly the same thing. When we were at bottom (or I thought when we were at bottom) I bought all large caps which turned out to be a multi bagger now. But once the market has picked up I am gradually converting part of my portfolio to small caps. The reason is that much growth is expected out of small caps than in a large cap in a boom market, well of course with the right picks. I liked Shabu's mango tree example... good one Shabu. :)

So basically a large cap can be multi bagger if bought at the right time/right value. But a small cap at the same time period can be even bigger bagger.

Thanks for your thoughtful post.

Thanks,
Vijay

Anonymous,  January 18, 2011 at 2:13 AM  

Dear Kumaran,

your blog is cool but according to your description i could see that investor must see price and valuation of the stock (point 1). If stock is under value and u find it a cheaper so buy in bulk and wait for min one year horizon. profit is there
but i couldn't find any effect of multi bagger on under value stock ?

i want to know that how could we find multi bagger ?

multi bagger stock can give you return in short term.

can u tell me how to find multi bagger ?

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