Every investor dreams of having multibaggers in their portfolio! The idea that a stock provides massive returns is often seen as a result of the patience shown by the investor. However, most investors miss out on multibagger returns & end up selling stocks at the wrong time. Let’s understand what multibaggers are, how they are created & what can investors do to maximise their chances of landing a multibagger.
What is a multibagger?
Multibagger stocks are stocks which have provided multifold returns to the investor. Generally a stock which has at least doubled from the buying price is termed as a multibagger. If a stock has doubled from its initial price, it is called a 2-bagger. Similarly, if a stock has become five times its initial price, it is called a 5-bagger.
Most stocks in Nifty 50 have grown more than 100 times their initial price to reach the current stage. The investors who have bought these stocks a few years ago (or decades ago) have enjoyed multibagger returns from such stocks & multiplied their wealth.
Even 1 or 2 multibaggers in a portfolio is enough for huge wealth creation which is exactly why these stocks are the most sought after stocks!
How are multibaggers created?
Multibaggers are created over many months, years or even decades because most stocks do not double overnight! Continuous growth of fundamentally good stocks over many years compound to the final outcome of a multibagger. To learn about the power of compounding, visit this article – How compounding works in stocks?
An investor needs to understand that a stock generally takes a lot of time to become a multibagger. Take an example of a multibagger stocks such as MRF Industries which was trading at ~ Rs. 6,000 in 2011. The same stock has ballooned to ~ Rs. 85,000 in 2022 at the time of writing which makes this stock a 14-bagger in 11 years. However, a key thing to note is that the stock rose 14 times in 11 years, yet there was no year where the stock doubled! The stock did not grow overnight, instead it compounded over the years & provided a multibagger return to its investors.
Why do most investors miss out on multibaggers?
Despite popular opinions, the reason why investors miss out on multibaggers is not lack of patience. In fact, investors tend to hold stocks for multiple years as long as they are in a losing position. The reason why investors miss out on multibaggers is due to their inability to hold strong stocks in profit! Most investors follow a profit booking approach where they end up selling strong stocks while holding onto weaker stocks. This causes most investors to end up being stuck with bad stocks while their potential multibaggers end up in the hands of other smart investors. To learn more, visit this article – Profit Booking or Loss Cutting!? Which strategy is better for investors?
The main point which investors need to understand is that for a stock to become a 10-bagger, the stock first needs to double from its current price. Many investors end up booking profits too quickly which ends their hope of a multibagger. Also, an investor’s portfolio needs to be well diversified in order to have a decent chance in landing a multibagger. More stocks in a portfolio means that there are more chances to bag a multibagger.
How can you get multibaggers in your portfolio?
Investors can follow a two step process to get more multibaggers in their portfolio.
The first step involves diversification of your portfolio. If your portfolio has only 2-3 stocks, then your chances of landing a multibagger highly depends on your luck. If none of your stocks end up being a multibagger, then there is nothing which you can do about it! A well-diversified portfolio allows an investor to have a much better chance of getting a multibagger. Imagine having 50 stocks in your portfolio, your chances that at least one of those stocks become a multibagger is much higher than an undiversified portfolio. To learn about how to diversify your portfolio as a stock market beginner, visit this article –How to diversify your portfolio as a stock market beginner?
Some investors can argue that a well diversified portfolio will reduce their chances of success. Such investors only want to keep a few of the ‘best’ stocks in their portfolio. However, nobody can predict that the current ‘best’ stocks will keep on providing the best results in the future. Similarly, nobody can predict a multibagger stock with 100% accuracy. To learn more, visit this article – Can anyone predict the stock market?
The second step involves holding onto profitable stocks which is much more difficult than it sounds. It is impossible to have a multibagger in your portfolio if you sell your stocks as soon as they are slightly profitable. The ability to hold onto a stock & believe in the growth story of the company is the only way in which investors can create multibaggers in their portfolio. A method which bridges the gap can be the partial profit booking method where an investor books some profit partially while allowing the stock to show its full potential. Holding onto strong stocks & cutting weak stocks is the simplest way to get multibaggers in your portfolio.
Conclusion
A well diversified portfolio where the investor has the ability to hold onto the profitable stocks provide the highest probability to get multibaggers in your portfolio. A lack of diversification reduces your odds of landing multibagger stocks. Excessive profit booking can cut your potential multibaggers well before they can show their true potential. However, the final decision on investing depends entirely upon the reader.
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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