Do you give multibagger stocks is the foremost question asked by many existing and prospective clients and I keep telling them that stocks don’t come with multibagger tags attached to them.
We work on the process of identifying good companies with strong run-way ahead of them and try and buy them at reasonable valuations and when the process is right, most of the times one ends up with so called multibagger returns or decent returns on stocks. (You can learn more about the 4 qualities we look at for the stock selection HERE)
However, in our view, you can increase the probability of hitting more multibagger opportunities by simply increasing your investment in stocks during bad market conditions.
The maths behind the same is really simple.
Keeping all things equal, suppose you have identified a good company, run by good management team and a strong run-way ahead and believe its intrinsic value to be around 100 per share;
Now during good market conditions (say 2017) you might get the stock at 120 per share
However during bad markets such as 2018, you could end up getting the same stock at say 60-80 per share.
Markets being cyclical they go through such good and bad phases; however if the company is good and performing well its intrinsic value will keep on increasing.
Assuming 4 years have passed, the company has done well and has grown its intrinsic value to 200 per share and even the markets have improved and the stock is again quoting at a premium of 20% to intrinsic value i.e. 240 per share.
So, that’s how you end up making 3-4 baggers on your purchase price of 60-80 per share. While the returns on the purchase price of 120 would still have been good; however for one to generate substantial returns the stock has to go through a phase of both earnings and valuations re-rating and valuations get re-rated the most from bad markets to good markets.
Now the above seems easy because we have compressed the holding period of 4 years to few lines and few seconds of reading; it is important to note that markets being volatile could go from bad to worse and in the interim your stock purchased at 70 could go further down to 50.
Thus, if the investor can keep his cool during the interim and realize the cyclical nature of the markets, there’s whole lot of money to be made by investing during bad markets and remaining invested.
In fact I strongly believe in the fact that while one cannot predict market movements, one can prepare himself by simply judging the pulse of the market i.e. whether there’s too much exuberance or too much fear or somewhere in between. For instance, if you believe there’s too much exuberance you could probably consider reducing your SIP amount by 20-30% and similarly when you believe the markets have corrected much and there’s too much fear you could consider increasing your SIP amount by 20-30%.