Book Review: Multibaggers- How to Profit from Mega Return Stocks

Book Review: Multibaggers- How to Profit from Mega Return Stocks

June 13, 20204:30 am
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The book Multibaggers: How to Profit from Mega Return Stocks is one of the earliest books of my investing career. It really helped me change my perspective on investing. The word Multibagger is used in stock market investment for those companies whose share price rise multiple times. I will take you through the key pointers in the book in this blog ” Book Review: Multibaggers- How to Profit from Mega Return Stocks “.

One of the points that keeps getting repeated in the book is “Good companies will become multibaggers only if they are bought at right prices.”

While everyone talks about investing in good companies and holding for long term, I think equally important is buying at low price.

A great example in Infosys. An investor who purchase Infosys in dot-com bubble of 2000 would have to wait till 2006 to recover his principal back. NEVER OVERPAY

Buying low always helps one to avoid making big mistakes

Book Review: Multibaggers- How to Profit from Mega Return Stocks
Historical Price movement of Infosys

How to generate multibagger returns:

1. Identifying a suitable company

2. Buying its stock at the right time (Low price)

3. Holding the stock until the potential of the company is more than fully captured in its price

4. Exiting

Each of the four parts is equally important.

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Book Review: Multibaggers- How to Profit from Mega Return Stocks

How to identify a potential multibagger:

  1. Look for companies in industries experiencing growth
  2. Buying a company in a new industry early in its lifecycle. Eg Hero Honda & ZEE Telefilms in 1993.
  3. Buying a good company with demonstrated growth in a market panic- Market Falls by 30% or more or the Price to earnings of the Market is below 12. Share prices even of good companies are beaten down to highly attractive, bargain basement levels. (While buying at sensex P/E of 12 will be highly attractive but difficult to achieve in the current easy global liquidity scenario. A ratio of 15-18 would also be quite reasonable) You can find the SENSEX P/E HERE
  4. Buying a company with proven capability experiencing temporary problems in a growth sector- The problem should be of a temporary nature.

Holding for the long haul– It is important to think of Multibaggers as business and not as stocks. Typical time taken to generate multibagger returns is usually at least five years.

Exiting a multibagger

  1. When the company’s share become intrinsically overvalued: Price(Market Capitalization) to sales =15  & Price to earnings of 50. 
  2. When the Sensex PE begins to trade at P/E ratios of 25+
  3. When alternate opportunities look like multibaggers- If exiting your present holding & buying another stocks can generate you better returns
  4.  When a company or industry fails to deliver

Borrowing money to invest in stocks is a bad idea. ALWAYS!

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Book Review: Multibaggers- How to Profit from Mega Return Stocks

Factors to look into while trying to identify multibagger stocks

1.Low market capitalization in relation to the addressable opportunity is a clear sign of the market ignoring a company’s potential

2. Price to earnings(P/E) below 10

3. Price to book(P/B)< 1

4. Price to sales(P/S)< 1

The key skill one has to develop to catch a multibagger is to be able to perceive positive change in an ignored sector and then take exposure to that sector in spite of bad news around it. Eg real estate in 2002

Emerging sectors are full of promise with very few listed companies. these companies tend to exhibit very high sales growth with commensurate bottom line growth. The common perception in the market will be that it is a very high risk sector. Investors willing to take a leap of faith, rewards can be substantial. Eg- organized retail in 2000 educational software, motorcycles in 1990.

The right time to buy new sectors is when a trend in the real world is very obvious but the market due to other factors ignores this real world trend.

Companies that are expanding rapidly tend to have patchy profitability & sometimes even disappointing profit growth.

Multibaggers are very rarely created in niche industries as scalability is a big problem in those industries. A company needs to achieve scale in order to deliver multibagger returns. For this the target market for the company needs to be fairly large which niche businesses do not have.

 

The best time to buy a company whose share price has fallen dramatically is to look for the price damage to cease. This means that the stock stops going down but it has not started going up yet.

Odds of success are better when one invests in a market leader.

Also such companies should always be trying to get better at whatever they do. Adapting with the changing world .

A good example is Titan Industries. Titan was originally a watchmaker and. As market evolved Titan acted dynamically to take advantage of evolving trends.  Expecting branded jewellary to be big segment, Titan rapidly expanded through its Tanishq Stores. Though Tanishq was a middling success, Titan also greatly enhanced its watch design capabilities. In hindsight, it is quite easy to see but extremely difficult to anticipate. Here scuttlebutt helps.

If a company consistently fails to execute, it is best not to invest in it. Or if the investment has already been made, it is best to exit and re-invest in other superior opportunities.

If the company is only promise and no delivery, there is no point in being invested it. If sales are not growing you should begin to doubt the management’s capability to execute.

It is generally prudent to first identify whether something is a long term trend or just a flash in the pan. Eg. Someone in 1990s can think  of dot-com as long term trend & motorcycle as a fad. One way to think about long term trend is that such trends are more likely to be created by fulfilling a felt need more efficiently.

Eg e-toys.com. there was probably a market for ordering toys over the internet. But it did not solve a critical problem.

The knack of buying good companies when others are selling in a frenzied panic has to be developed in order to generate multibagger returns.

The core concept for identification of multibaggers is very simple: Finding unrecognized change 

It is independence of thinking that will generate multibagger returns and not extraordinary intelligence or ordinary information.
Book Review: Multibaggers- How to Profit from Mega Return Stocks

A multibagger return from a properly selected company is created in 3 parts:

  1. Attractive purchase price
  2. Improvement in company’s fundamentals
  3. Re-rating and market excess

Three major reasons to sell a properly selected stock:

  1. Overvaluation
  2. Permanent adverse developments which a management cant innovate its way out of
  3. If the original reason for making the investment is no longer valid

Volatility is created by the herd-like mentality of most investors in the market. Investors are very afraid of notional losses. Volatility by itelf is usually not a reason to sell a properly selected stocks.

The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long term values— Warren Buffett

Developing the judgement to identify whether poor performance is temporary or permanent is essential in order to be able to decide whether to buy, sell or hold. 

To looks for company’s that can give multibagger returns, it is best to avoid sectors with too much govt interventions. Eg Petroleum, Sugar companies

Overvaluation & irrationality are in the very nature of the market. But when these ratios are breached, it is worth being cautious & ready to sell if you believe that the price move is not sustainable.

Everyone makes mistake in market and a number of them. The key to a happy life is to consider each sub optimal sell decision a learning experience.

A persistent lack of growth in sales is a sure signal that the management is facing some difficulty in exploiting opportunities.

The decision to sell is very easy in something that you doubt. But when a stock has been a spectacular performer in your portfolio, the decision to sell can be quite wrenching.

How to take decision on booking profits:

1. Very high market capitalization in relation to market size: The best example of this was Zee Telefilms in the year 2000. The company was trading at a P/E multiple of 757 and had a market capitalization of ₹60,000 cr when the estimated size of the media business was only 10,000 cr. This was a great sell signal to sell.

2. Very high valuation- When the ratios are very high, it implies that expectations of performance are extremely high. It is always best to buy when expectations are low and sell when the expectations are extremely high.     

3. Market tops: Look at the valuation of the index. If Index P/E is around or more than 30. It is worth examining your portfolio to find out overvalued stocks & getting rid of them. 

A VERTICAL UPTREND COMBINED WITH ABSURD VALUATIONS IS IS USUALLY A GREAT TIME TO EXIT A STOCK.

It is always best to recognize that once a stock has given you spectacular return, it is best to sell it and focus on finding the next multibagger rather than get caught up in analyzing how much more money you could have made had you stayed with the one that kept going up.

How does a bull market start?

A secular bull market is an extended, multi-year bull market in which stock prices increase consistently. It is characterized by improving economic performance of the country and good earnings growth of companies. Bull markets are born in weak economies with interest rates hitting multi-year low. The first stage of a secular bull market is characterized by skepticism and a total lack of interest. 

Economic and company performance is lackluster and a general belief that things will not get better. In 2003, when the market rally started on the back of very good monsoon, people expect it to fizzle out quickly.

Some other features of this bull market are that equities form a very small percentage of household savings, the P/E ratios of stock market indices are very low & small & mid-cap indices trade at huge discounts to even the intangible asset value. IPOs are uncommon. 

In the second stage there is a gradual acceptance and wider participation in the market. Skeptics still abound but their vociferousness reduces. The only approach that yields profits in this stage is ” buy in dips”

In the third stage of bull market, there is euphoria. Everyone thinks that making money in the market is very easy. The theory becomes new paradigm has arrived.

How does a bear market start?

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A secular bear market is a mirror image of a bull market. It is an extended, multi-year period of negative market movements. From the third stage of a bull market, a bear market starts to develop and share prices keeps heading lower and lower. Bear market is also characterized by sharp intermittent rallies followed by further selling.

Right before the first stage of a bear market, the economy is usually very strong. Predictions of new extraordinary highs in the market are rife and interest rate reach multi year high. In the first stage there is a complete disbelief that a bear market can even occur.  As markets fall, leveraged positions are sold off to cover margin calls. This results in extreme price moves. A lot of people are still in their bullish mind frame and believe that with dips market should be bought into.

In the second stage, investors are in a shock that how the market which showed so much promise just a while earlier can tank so badly. A lot of individual investors go into denial.

In the final stage, there is a selling cresendo with huge volumes. Those who had held on their stocks earlier with the hope of selling at a higher price decide to get out at whatever price they get. That is total desperation. By the end of third stage, investors will start finding companies at extremely low valuations.Low single digit P/E multiples become common. On the way to bottom, several corporate misdeeds come to light. Frauds that got hidden in the bull market excesses become apparent.

Markets do not only move in bull and bear markets. Sometimes they consolidate for long periods of time. In a consolidation, the index may not show any significant movement but individual stocks rise/fall depending on their own dynamics.  Stocks such as Infosys and Hero Honda became multibagger during this long consolidation. The key to keep looking for companies/sectors with tailwind.

Why bull & bear market happen?

Why bull & bear market happen?​

A video I found on youtube explains the key pointers in the book:

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Shekhar Yadav

I am a full time stock market investor. The blog is an extension of my research, thoughts & opinion. Please don't consider anything on this website to be an investment advise.

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