With the bull market in full swing, there’s no dearth of investors, trading platforms and fintech firms out to convince you that making money from equities is a breeze.
Ads for a fintech firm show folks who can’t manage everyday stuff like shopping, exercising or keeping to a diet, trading in stocks as easy as pie.
Newly sprung up investing gurus tell you that all you need to do to earn untold riches, is to identify a bunch of ‘quality’ stocks and invest in them robotically.
It’s true that the act of buying a stock has become a simple exercise, thanks to slickly made mobile apps. It’s also true that if you’re hoping to make long-term money from stocks, you should be buying financially sound, well-known companies.
But it would be an extreme over-simplification to think that getting such basic stuff right is enough to earn multibagger returns from your stock portfolio.
Unearthing multibaggers requires multi-year effort in knowing a business well before buying it and tracking it relentlessly while you own it. When the company enters a rough patch, you need to know whether to bail out immediately or hold on in expectation of better times. Even if you do all this, a stock may languish if Mr Market fails to develop a fancy for it.
Here’s what the investing gurus plugging multibaggers, aren’t telling you about their investing journey.
#1 I was lucky to find it
When you look at lists of multibagger companies today, you may beat yourself up about why you couldn’t foresee their business success that was so obvious, ten years ago.
What it really so difficult to foresee that Britannia with its portfolio of biscuits, cakes and dairy products could piggyback on the growing incomes of Indians, to deliver a 35% CAGR over the last decade? Or that Pidilite Industries owner of the beloved Fevicol brand, would build on it to deliver a 29% CAGR? Was it so tough to believe that Eicher Motors, owner of Royal Enfield, would have affluent young folks queuing up to own its high-end bikes, helping the stock earn a 35% CAGR?
If you have such regrets, be aware that they’re loaded with hindsight bias. Britannia’s stock returns in the last decade have not simply come from a rising appetite for biscuits or cakes on the part of India’s upwardly mobile consumers. Ten years ago, Britannia was a low margin biscuit and bread maker with uninspiring leadership, its market shares under siege from ITC and Parle. Its transformation into a high-margin FMCG player was led by a management change that overhauled its product mix, raised its margin profile and continuously fought off aggressive rivals. The resulting rise in the company’s earnings and ROE, sparked a re-rating and its multibagger returns.
The bulk of Pidilite’s growth in recent years has come, not from carpenters stocking up on Fevicol, but from the rapid inroads the company has made into B2B niches in construction chemicals, waterproofing solutions and sealants used in housing and insulation.
It would have taken Nostradamus-like qualities for any investor assessing Britannia or Pidilite ten years ago to foresee the product and business transformation that led to their stock’s multibagger returns.
This is why, most seasoned investors, if they’re honest, admit that serendipity (stumbling upon a discovery by chance) plays a big role when one first picks up a multibagger stock. The story of Eicher Motors, a stock that most serious investors thought to be a dull CV play ten years ago, is a great example of the role that luck plays in creating multibaggers.
When buying into a business, it may seem not very different from its industry peers. But over time, it is companies that manage to build durable competitive advantage through their product mix, distribution reach or customer relationships, driven by inspired leadership, that ratchet up their ROE, catch market fancy and deliver multibagger returns.
A big mistake many retail folks commit is to ‘book profits’ on their performing stocks the moment they double or treble from their buy price. But the secret to creating multibaggers is not just buying good companies, but tracking their business progress over the years, so that you build conviction to hang on through rough patches. Only this helps you benefit from earnings compounding.
#2 They changed with time
Seasoned investors praising chemical or FMCG stocks today may not tell you this. But the much-adored multibagger stocks tend to be different in each bull market. Therefore, the notion that if you simply buy and hold ‘quality’ consumer names, they will do the trick, is quite wrong.
Experience with Indian bull markets over the last three decades suggests that each new bull market throws up a different set of multibaggers from new sectors. Today, a lot of multibaggers are from the chemical space. In 2013, they hailed from pharma and auto sectors. In 2010, they came from the power, capital goods, real estate space.
The following table tells us that how multibagger lists have differed quite a bit depending on the start and end dates you used for your assessment.
The above listings tell us that multibagger stocks don’t always come from easy-to-analyse sectors such as FMCGs or consumer appliances. Many industrial names from chemicals, pharma and agrochemicals requiring a certain degree of technical sector knowledge, do turn multibaggers. It is also noteworthy that multibaggers needn’t always be ‘quality’ stocks with a good governance certificate.
#3 Some decimated my wealth
Multibaggers of today may well turn out to be wealth-destroyers of the next bear market. Multibagger returns on a stock can come both from underlying earnings growth and the market taking an inordinate fancy to it, which re-rates its PE multiple.
When re-rating is a big contributor to returns, the stock can experience a big crash if governance issues surface or external headwinds buffet a sector, leading to the market suddenly taking a bleak view of its prospects.
Of the feted multibaggers of the 2003-2013 period, Unitech is down 91% today from its 2013 high. Peninsula Land is down 80%, while Sintex Industries is down 89%.
Of the multibaggers of 2000-2010, Prakash Industries is down 63%, BHEL 77% and Uttam Galva Steel 94% till date. From the 1998-2008 crop, we have stocks such as Videocon, Rolta, Aban Offshore, Reliance Infra which have lost over 90% of their peak values.
This suggests that investors who do hold ten-year multibaggers cannot afford to relax their vigilance on sector prospects, company performance, governance issues or even external risks. Any or all of these wild cards can decimate the returns one took for granted.
Generally, stocks that have turned multibaggers on the back of earnings compounding are more likely to hang to their gains than those that have been beneficiaries of PE re-rating.
#4 I had a bone-rattling ride
Multibagger stock listings based on CAGR give you the impression that the stock had a steady and uneventful climb over the years. But in reality, most winning stocks subject their investors to a bone-rattling ride due to business and market cycles. Only investors who have their seat belts on tight and have both the business understanding and the gumption to hold on through ups and downs finally get to enjoy those great-sounding CAGR returns.
The stock of Avanti Feeds, a top multibagger of this decade with a 70% CAGR, is an excellent illustration of this. For three years from 2010, the stock languished well below Rs 20 (adjusted price). In a sudden burst of action, it zoomed to Rs 220 levels by October 2015 and then crashed 45% in the next six months. It then spent a year in limbo before spiralling to heights of Rs 940 by November 2017. After a 70% crash, it has now climbed back to Rs 581 levels.
To hang on to such a stock for dear life through those gyrations, an investor would have had to possess absolute conviction on the business and management, apart from nerves of steel. It is quite hard indeed to imagine any ordinary retail investor hanging on through this ride.
Stocks belonging to the consumer or IT space may not go through such gut-wrenching gyrations. But even their investors do need to hold on through long spells of sub-par performance or nil returns. Developing a deep understanding of the business is the only secret to building such long-term conviction in a stock. There are no short-cuts.
#5 My positions were insignificant
When investors boast of CAGR returns in the social media, they seldom reveal the size of their positions in a stock or the amount of absolute wealth it created for them. But for any multibagger to have made a difference, they need to have invested a significant portion of their portfolios in it.
In real life, this is where most investors slip up. Due to the lack of money at a given point in time or the lack of sufficient conviction, one may fail to build significant positions in promising stocks. The stocks may go on to become multibaggers but making little difference to one’s wealth. At times, one may even ‘book profits’ in the fear of losing existing gains, reducing stock weights when we ought to be adding to it.
Today, when investing gurus showcase their ‘investing is easy’ philosophy to newbie investors, they urge them to start small SIPs in a basket of quality stocks to build their riches in the long run. But multibagger stocks often deliver the bulk of gains within short periods, therefore a lumpsum strategy often delivers better returns than a SIP strategy.
The following multibaggers are an illustration.
In the case of steady compounders, the position size you acquire through a SIP can also be lower than that which you acquire through investing a big lumpsum at the outset.
The following table compares the value of shares you would have accumulated in select multibagger stocks between April 2011 and April 2021 on investing a lumpsum of Rs 12.1 lakh at the outset versus a monthly SIP of Rs 10000 over the 10-year span.
This earlier article we wrote also explains why SIPs don’t always work for direct stock investing.
All this is not meant to discourage you from hunting for multibaggers. Without a passion for this hunt, you cannot succeed at direct stock investing.
But all this goes to demonstrate that stock investing is far from simple. If you’re willing to put in the homework and survive the grind, serious wealth is well within your reach.
With data inputs from Anush Raj P.