When we talk about missing multi-bagger stocks, it is not just the retail investors but even seasoned investors who miss out on obvious multi-baggers. In fact, fund managers and portfolio managers tend to miss out multi baggers more often because they focus more on being in the right side of the market. So how to identify multibagger stocks and are there multibagger stock tips India? Is there a framework for identifying multibagger stocks and to know the ones that will create wealth in the long run? Before we focus on stocks to watch for beginners, let us first focus on the 6 common mistakes that prevent them from identifying and benefit from multibagger stocks.
Looking for tips on multi-baggers
Well if you are looking for tips then you are most likely not going to find any multi bagger stocks. Remember, nobody came and tipped that an Infosys or Hero Moto or Eicher would become the next big multi-bagger in India. If somebody really had that kind of confidence they would be better off trying to invest their own money than giving you tips on multi-baggers. So if you are trying to identify the next big multibagger, first stop looking for tips from friends and brokers. Try and do you own research, read up extensively, evaluate the prospects and above all have a lot of patience. Expecting that your broker or your friendly neighbour will give you a multibagger idea is just being too optimistic.
Being in a rush to book profits
Let us assume that you actually get into a multibagger stock. The bigger challenge is to hold on to them. For example, if you had bought Eicher Motors in 2009 at Rs.200, you would have been mighty impressed that the stock had doubled in 2 years. Conventional wisdom would have dictated that you should book profits in Eicher. That is because it has already yielded 35% annualized returns and in the stock market if something is too good to be true then it is possibly not true. That is exactly where your conviction comes in handy. For example, had you held on for another 5 years, the Eicher stock would have touched Rs.30,000/-. That is the stuff that multi-baggers are made of.
Focusing too much on low P/E stocks
Remember, identifying multibagger stocks is not about low P/E or high P/E. Of course, these could be incidental but you are never going to identify a multi-bagger stock if you purely focus on buying low P/E stocks. Multibagger stocks are those that are at a tipping point and are likely to see disruptive growth in revenues and profits. That comes only when they manage to disrupt the industry. That is exactly what Eicher did to the two-wheeler industry and Bharti did to Telecom.
Focus on index stocks rather than on mid-cap stocks
If you buy an index heavyweight and expect it to become a multi bagger then you are just being too ambitious. Let us take the example of TCS. The stock is already having a market capitalization of $80 billion. Even if it were to become a 3 bagger in 5 years we are looking at a company with a market cap of $250 billion. These heavyweights are just too heavily tracked and analyzed to have any big upside left in them. Your focus should be on mid cap stocks that have the potential to become large caps. Stocks like Titan and Lupin became multibagger stocks when they migrated from mid caps to large caps over a period of time.
Not having the patience for the multi-bagger story to play out
Patience is the billion dollar formula when it comes to multibagger stocks. A multibagger stock could take up to 8-10 years to manifest itself. You need incredible amounts of patience to hold on for so long. But that is the price you have to pay for enjoying a multibagger. That is where most investors falter. When a stock becomes a 3-bagger or 4-bagger it is just too difficult to resist the temptation to book profits and cash out. But in the process you may be missing out on that 100-bagger. The choice is yours. It is this boring patience that ultimately counts when it comes to identifying multibagger stocks.
Diversification across too many themes is not acceptable
You can diversify to play it safe in the markets. But when it comes to multi-bagger stocks you cannot play the traditional diversification game. You need to look at your investment in multibagger stocks as a call option on the stock. You need to look at it as a discrete series wherein you are either at point-0 or at point-1. Even the great Warren Buffett who identified many multibagger stocks in his lifetime had underscored the frivolity of diversification when it comes to multi-baggers.
So, before embarking on a multibagger journey, remember to overcome these 6 common mistakes that you tend to commit when looking for multibagger stocks. That is a good way to begin your journey. After all, the next big multibagger stock may be just round the corner!