The quest for the next “multibagger” stock has sunk more retail investor capital than has any other theme in the Indian market.
The allure of this theme is very primal, that is why it has so many takers who often defy logic and common sense in a rush to deploy capital into the next “potential multibagger”. It is not that multibaggers do not exist, it is just that the constant and dedicated search for one will most probably turn out to be counterproductive.
To the man with a hammer….
None of my multibagger stocks started off looking like one, there has not been a single instance where I researched a business and could confidently say “This will make me 5X over the next 3 years”. What it usually starts with is a combination of underappreciated business quality, undervaluation and a respectable growth runway, there on the market takes it higher depending on a lot of factors.
The importance of context is very much underrated when investors look back on these multibagger stocks with the benefit of hindsight. What looks very obvious in hindsight was never the case as the scenario was unfolding.
- Would Astral Poly have become this big had any of its larger peers (Supreme Industries, Finolex Industries) competed aggressively before the company entrenched itself into the cPVC segment? Maybe, but you can’t say for sure
- Would APL Apollo have grown to today’s dominant position in steel tubes if Tata Tubes had decided to compete aggressively in the market 10 years ago?
These aren’t things one can model for or plan for, one can only adjust course as the situation unfolds.
Preity Zinta in Dil Chahta Hai – “Pyar bas ho jaata hai”
Allow multibagger stocks to reveal themselves, do not perennially be in the search for them. This way you can spot the real deal when you see it.
I hence find it particularly interesting when I come across equity advisory services that claims to be experts in unearthing these multibaggers. 5 out of 25 stock recommendations turning out to be three baggers does not necessarily improve the return profile of the overall portfolio, what if 8 of the remaining turn out to be duds which lose 70% of the invested capital?
The other variable that never gets its due is capital allocation. A multibagger stock with a 2% starting weight does not move the needle too much, while the same stock at a 10% starting weight can move the needle. It is very difficult to take a 10% bet on a single stock when the rest of the portfolio is comprised of similar unproven businesses.
Over a period of almost a decade, I have come to the conclusion that a higher quality portfolio enhances your ability to bet big when you start seeing the first signs of a multibagger stock emerge. My portfolio today has a mix of secular compounders, a few stocks that can emerge as the next set of blue chips and then the “potential multibaggers”; all bought at reasonable prices. Till 2016 none of the stocks in my portfolio were > 15,000 Cr in market capitalization because that is the segment where I saw the most value. I have no qualms in stating that I was lucky that there were no tail events during the period of 2010-16. A COVID-19 like shock would have decimated my legacy portfolio and set me back by 3-4 years.
By the time we went into the COVID-19 meltdown of March 2020, my portfolio had a healthy proportion of stocks that were relatively immune to the market meltdown. This enhanced my ability to take some interesting bets through the period of May to July 2020, a couple of them did turn in 100 %+ within no time; but that is not something I had planned for nor had anticipated. If not for the durability of the existing portfolio, I would not have been in a situation to take those bets. I would have been licking my wounds and staring at a 40% fall from the peak in under a month. The best investment opportunities often present themselves during a market meltdown, in such a situation how can one bet big money when one has concerns about the quality of the existing portfolio?
Which is why I am clear in my mind that I will never launch an equity advisory service which is built upon the perennial quest for discovering multibagger stocks. I would rather provide a service that customers can confidently stay with through periods good and bad. The objective should be to improve the quantum and quality of returns over the medium term rather than to shoot for a period of extraordinary return over the short term. There is no point is seeing 100 go to 60 after making 30% p.a. over 3 years. Most investors need to go through a shakeout to appreciate the importance of this point.
An equity advisory service suffers from some flaws inherent in the advisory model where subscribers will need to own the execution part of it
- Tendency of subscribers to second guess the portfolio and to make their own modifications
- Lack of visibility into the actual return of each subscriber’s portfolio
- Translation errors and execution lag
- Cash flow considerations even when good opportunities exist
Subscribers to any equity advisory service should do their detailed due diligence before they sign up and then trust the advisor’s judgement above their own. Else the investment outcomes are likely to be sub optimal.
At the very least an equity advisory service should have
- Clarity on the risk profile and what kind of customers should ideally be signing up
- Clarity on which market segments to avoid, when and for what reasons. An equity adviser should be able to say “I have decided to avoid 40% of the NIFTY 50 for XYZ reasons”
- A well-defined investment process that has withstood a couple of market meltdowns. If you cannot articulate it, you mostly likely do not have one
- Risk mitigation at all points of time through various kinds of limits. Sector limits, market capitalization limits, promoter family limits and some more
- Regular communication that reinforces the adviser thought process and also attempts to ensure adherence to the actions being suggested
As they say in weight training, you cannot out train bad nutrition. In investing, all of your equity research skills cannot overcome a bad portfolio construct; unless one is talking of an investment time frame of 10+ years where two excellent stock picks can make up for the rest.
One cannot go into an important game with six batsmen who bat like Sehwag, what if you come up against a Mitchell Starc bowling toe crushing in-swingers at 150 kmph with the new ball? Always ensure that your team can put up 230 runs on the board and take it from there, this is what separates great teams from the good ones. The Indian cricket team of 2011 rarely had off days while the 2003 team did have some off days, unfortunately one of them was a World Cup final.
Investors look for above average growth coupled with longevity and predictability in their businesses, the ability of the underlying businesses to stay the course and to see out bad periods without taking too much damage is what keeps them in the long-term hunt.
Should it be any different when it comes to choosing your equity adviser?