Few of my friends losses huge chunk of their money by investing on stocks that they considered to be multi-bagger. This is common to most of the investors who does not have the in-depth insight on the stock market. Everybody likes make quick money and they look for stocks to invest that could multiply their money. Investors are interested in multi-bagger stocks primarily because they assume that these stocks offer the potential for exponential wealth creation, delivering returns that are 100% or more than the initial investment.
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The term "multi-bagger" is coined by Peter Lynch who popularized the term "multibagger" in his 1988 book One Up on Wall Street. The is used for stocks that can grow to two, three, or even ten times their initial value within a few years. Taking a Hypothetical example:
An investment of $100 that grows to $1,000 in a few years is considered a multibagger, as it has provided a 900% return.
In todays time, when more and more investors are pitching into stocks market, they consider every other stock to turn into multi-bagger. However, Peter Lynch defined the concept of a multibagger and provided the framework for ordinary investors to discover them through diligent, common-sense research. It is important to note that these stocks also come with significant risks, including high volatility, the possibility of the company failing, or the risk of mispricing. Identifying a true multibagger requires thorough research, a high-risk tolerance, and a commitment to a long-term investment horizon -often 5 to 10 years or more.
In my case, I simply follow a 5 step process to identify a possible multi-bagger stocks.
Think long term : Multibaggr are not created in month period of time. They need time patience and discoline to becomes high returnable stocks.
Invest in business : It is important to not look at the stocks. It is essential to look beyond the share prices. Ask is this business solving a real problem? is it growing fast? Name go by the market hype and use own thorough research about business model.
Look for "Walk-the-talk" management: A Great management of a company does not just make promises, they more inclined towards delivering their performance on quarter after quarter basis.
- Expansion must show in the number : A business can tell stories but profits margin and cash flows tell the truth. If number are expanding the business is expanding too. Keep a watch on the company performance.
- Know when to exit : Every business has a peak . Timing the market is important. Exist when the business hits its full potential - not when the stock collapses later.
An important suggestion that everyone should keep in mind that, there is no guaranteed method for overnight wealth creation. Many potential multibagger stocks may fail to materialize due to various unforeseen factors. So be careful before investing.
In good faith - Peace!!
