Spotting multi bagger stock options is a tricky job not just for veteran investors but even beginners. Most fund and portfolio managers tend to miss out on multi bagger stocks by playing safe or attempting to be on the “right side” of the market. For the uninitiated, multi bagger stocks are those stocks that return more than double upon the amount in them. The year 2020 saw nearly two dozen multi bagger stocks in India that provided more than double investor returns during the post-lockdown period. Identifying multi bagger stocks is a crucial step towards investing in them. However, few common mistakes may result in investors missing out on obvious multi bagger stock options.
Common Mistakes that may cause Investors to Lose out on Multi Baggers
Seeking Pointers on Multi baggers
If you are someone who is looking for some quick pointers on multi bagger stocks from your close social circle, brokers, or the media, then you would be conning yourself and losing out on time and money. This is because no amount of tips work in identifying multi bagger stocks as every stock has a story and one must choose sectors that they understand and believe in. Identifying such stocks in India is a self-led, in-depth process, and picking up stocks from sectors that are investor’s core competency would be a good vantage point. So, the mantra to identifying multi bagger stocks in India is self-help. Read and research extensively on the company’s financials, evaluate its growth prospects, rely on your own judgment, and be patient.
Haste to reap Returns
Identifying multi bagger stocks is a long-drawn process. An even bigger challenge is to hold on to them for about 5-15 years when these stocks have the potential to provide nearly 100X returns. However, when the value of stocks gets doubled in a couple of years of investment, investors rush to reap returns with a pearl of conventional wisdom, and the perception that these stocks rising further up is too good to be true. So, patience is a virtue to hold on to the stocks and it is also a price that an investor pays for enjoying multi bagger returns in the long term.
The stockvalue fell by 90 percent and can’t slide further
This is one of the most common mistakes that people make while identifying multi bagger stock options. Suppose a company ABC’s stock value that was priced at Rs. 100 a few months ago fell by 90 percent. When the stocks fell, say an investor bought 100 shares priced at Rs. 10 per share with the belief that markets cannot correct themselves further and the risk is low. However, if the share value further fell by 80 percent to Rs. 2 per share in a month, the investor would already have accumulated a loss of 80 percent since his investment. So, while identifying multi baggers, analysing the fundamentals of a company properly is essential rather than blindly going by the percentage fall of the share value.
Excessive Emphasis on a company’s P/E ratio
A company’s high P/E ratio is not an absolute indicator to identify multi bagger stocks. It is only a key factor along with a host of other factors such as the company’s good business model, structural changes in organisation, and sustainable competitive advantage that can potentially drive disruptive growth in its revenues, setting new industry benchmarks. The stocks of such companies are deemed to fit into the multi bagger stocks category.
Unwarranted Emphasis on Large Cap stocks
Investors tend to excessively track and analyse large-cap stocks that rarely have a big upside to them. Besides, big investors of large caps have not grown further bigger as every stock they have held for years has already turned into a multi bagger stock. However, small and mid-cap stocks have historically given the maximum number of multi bagger stocks. Most small and mid-cap stocks have transitioned into the large-cap before turning into multi bagger stocks. So, it is important to focus on small and mid-cap stocks that hold the promise of turning into the large-cap.
Going with Trend Stocks
A majority of multi bagger stocks emerged out of sectors that saw an upward trend and there is always one or the other trend that unfolds in the market. Investors must avoid buying stocks that go by the trends in a rush, as once the trend ends, the stocks shall slide. This sets up a moment where everyone is tempted to buy the falling stocks and a possible multi bagger story disperses into thin air. So, investors need to avoid falling into the trap of blindly buying trend stocks assuming them to turn into multi baggers. Only, time and a company’s continuous growth are the primary reasons for multi baggers to emerge out of certain trends and sustain them.
Over-diversification of stocks could prove to be a regressive step that may prevent investors from achieving their multi baggers. While diversification is crucial for asset allocation, it may not be an efficient mechanism for stocks, in case their number is too high. Investing in a large number of stocks might generate decent returns but never exponentially high returns like a multi bagger. Instead, it is better to go into detail with an utmost of 6-7 stocks spread across sectors or based on your risk appetite and return expectations.
Multi bagger stocks are never the stocks at the forefront but stocks that are presently lying low and yet showcase a future growth potential due to factors such as robust business model or capable management. You can easily identify multi bagger stocks in India if you are aware of their basic traits and avoid the above-mentioned common mistakes on your multi bagger journey. Most importantly, do not underestimate your self-belief while making decisions that could emanate out of your extensive and thorough market research, and a rigorous evaluation of a company’s fundamentals and growth potential.