How to find Multibagger Stocks?

“Hypothetically, you only need four multi-baggers in your life and an initial investment of ₹10,000 and you’d be set for the rest of your life.” Yes, I know the ‘Hypothetically’ really dampens the excitement of the idea. But that line sure has a nice ring to it, doesn’t it?

What stood out of that statement for me the most was the term “multi-bagger”. Granted, as an avid enthusiast of the fantasy genre, an investment instrument that returned tenfold or even more seemed like the perfect gateway to a little daydream of money glory and more.

In retrospect, however, I understand that just like my far-fetched imagination, finding a multi-bagger stock is an equally fabled phenomenon for many investors. So today, I decided to present my two cents on the matter of how to find multi-bagger stocks to enhance your portfolio.

So how about we demystify things a little, no not my imagination, let that be. I’m talking about multi-baggers.

What is a Multi-Bagger

A multi-bagger is a type of share that earns more than 100% returns. That's the very finance-y and bookish definition. What it means is that multi-bagger stocks earn as much as their price or even more. This earning is generated either through the increase in the value of the concerned share or through dividend earning.

To elaborate on the “hypothesis” mentioned above, the ₹10,000 would be invested in four multi-baggers, all of which would earn 10x returns. This is what the life cycle of your investment would look like:

So based on this example, companies A,B,C and D are the four stars of the aforementioned hypothesis. Now, the odds of finding a multi-bagger with 10x returns are astronomically low. Finding a multi-bagger however, isn’t that tough. Based on what I have gathered from my personal experience, the following are the minimum requisites to finding a multi-bagger.

Know the Business

Investonomy by Pranjal Kamra is an extraordinary read about investing. There’s a line in the book that has stuck with me. Oh, and by the way, you have read Investonomy, right? In case you haven’t, no worries, get the book right now and read it!

So coming back to the line in question, it goes like this, “The safest bet is to invest in a business which even an idiot can run because someday an idiot will run it.” One thing I’ve also realised is that every shareholder is an owner of the business.

So adding the two statements in my head together, I came to the realisation that I’m an idiot.

Well jokes aside, it’s obvious that the line is a jab at possibly inferior management of the company. Based on another inference drawn from the line, I understood is that one should invest in only those businesses that are very easy to understand. So much so, that even an idiot by the investor’s standards could understand its workings.

What this does for the investor is it familiarizes the investor with the business on a fundamental level. This allows them to know whether a business is good or bad based on its operations, not superficial and unstable data like just price or rumours regarding market conditions.

Basically, the trick is to not find cheap stocks, but find fundamentally sound stocks that are currently undervalued. Profits occur when the market reaches an equilibrium.

During this period of equilibrium, companies reach their fair values and the undervalued, yet fundamentally sound stocks experience value appreciation.

Capable Management

The strength of a ship is not tested by just shallow waters, but also by the captain’s wisdom. When this statement is equated to a business, it goes to show that it’s not just the tough times that a business faces that show how poorly or well it functions but also who’s running the business, i.e. the management.

Take our recent recollection of the Tata Sons CEO mishap for example. With Mistry, the Tata group of companies faced severe downturns and legal troubles, while Chandrasekaran’s entry reversed it.

Another way to gauge a company’s management is by comparing the process of running a company with driving.

When you think about road accidents, who do you think gets in them the most? Usually, it’s not the careful, aware and prudent ones. The former do get in accidents when they’re exposed to careless, oblivious drivers.

Reckless management will also gravely injure companies or if worse gets to worst, maybe even make it meet its demise.

Market Leadership

The king of the hill reaches the peak with great struggle, damned is he if he lets himself fall off it. This is the mentality that fuels the many businesses that soar the markets presently.

Your multi-baggers are hidden among these leaders. The “underdog company” that could succeed, would succeed but isn’t successful yet. So let it be. You want to pick a company that’s been through the trials and tribulations that come with the establishment of a new business. You want a company that has met its competition, dealt with it and has left it behind.

Take Colgate for example, the oral care brand has grown to be one of the largest in India with a majority market share that isn’t too closely rivalled. With a past as deeply rooted in the country as Colgate, do you think that the company could be dethroned from its position anytime soon?

So your multi-bagger is a company that has fortified its position at the top of its metaphorical hill and you know for a fact that its position isn’t threatened for the near foreseeable future.

On a Quest for Knowledge

Whether you are a brand new entrant to the stock markets or a seasoned veteran, the only thing as valuable as a portfolio with stocks like the ones mentioned above is the knowledge needed to be able to make one.

But how and where does one find and acquire the knowledge necessary to create an all-star portfolio? The information available in books isn’t always accessible. And looking at the internet can be a bit too overwhelming with the vast amount of information that’s available a bit too easily.

This is why Quest by Finology is an absolute boon for anyone looking to hone their financial literacy. The edtech platform has courses tailored for various levels of financial literacy, attention spans, investing styles and more.

So head on over to Quest by Finology and begin your adventure into financial education today!

Conclusion

The term “multi-bagger” has earned a sort of fabled reputation over time. So much so that investors often wish to stumble upon it by chance instead of actively looking for one to improve their portfolios.

Hopefully, today’s article has been something of an eye-opener for you and made a few stocks click into your mind that you were considering investing in but didn’t pull the trigger on.

Hasta la vista. Happy Investing.

*Disclaimer: The stock(s) discussed above aren't recommendations from Finology, they are only picked to make you understand the concept.