100-bagger stocks versus 100-bagger portfolios
Investors are getting excited about hunting, chasing and capturing the 100-bagger stock. The allure of this new fad is not hard to see. The allure is similar to what typical angel investors and venture capitalists chase, i.e., finding the next Google or Facebook. It provides bragging rights to the discoverer. It is just one catch, but it takes 20-30 years, or more, for the typical 100 bagger to deliver. Most braggarts would be much older by then and the excitement of bragging would be much mellowed.
Everyone is keen on learning and playing the new game in town. No one seems to be questioning whether the game can be played at all. The inspiration for all this is a book—100 to 1 in the Stock Market, by Thomas W. Phelps, first published in 1972. You may not have heard of this book but it is famous now, thanks to the fad.
The interesting part is that over a 40-year period, till 1971 in the US, there were only 365 stocks that turned 100 baggers. Another study of 50 years or so also revealed 365 names (also in the US market). Another Indian study revealed 47 stocks over 20 years. That tells you how rare these opportunities are.
In India, there are 5,000-plus stocks listed on the exchanges, with numerous companies going out of business every year. So, only on 4-5% of the total trading days could one have bought these 100 bagger stocks, selecting the ‘One’ from the 5,000-plus stocks trading on that day. And then—and this is critical—the stock had to be held for the next few decades before it turns into a 100 bagger.
Some of the markers of a 100-bagger are:
• The market for the products or services of that company should be scalable, so that volumes and sales can grow manifold
• The margins should be growing, so that the earnings can accelerate
• The valuations or price-to-earnings (P-E) multiples should be low, so that multiples expansion can happen.
A typical example would be a stock whose sales have grown by 10 times; margins have doubled, i.e., the earnings are up 20 times; and the valuation multiples has gone from a P-E of 5 to 25. This would be a 100 bagger. Of course, all of this assumes that there were no issuances of stocks during the growth phase.
A typical 100 bagger takes 26 years. That translates to an annual return of 19-20%. This is not that difficult to achieve, especially in the Indian markets. Of course, you would lose buying power as well in the Indian markets, thanks to the high inflation. In fact, the whole Indian market itself could be a 100 bagger over that period. So an Indian investor probably wants to achieve that in half the time, i.e., 13 years. But that would mean an annual return of 42.5%, which is highly unlikely.
Another issue is that this whole process supposedly goes together with what George Baker, the 19th century American banker, said, “The vision to see them, the courage to buy them and the patience to hold them.” To which he added, “The rarest is patience.” Apart from these, vision too is a quality that is rare. Most people, whether investors or not, think that they have vision. In fact, except for venture capital investing, where it is an occupational hazard, vision is not a great thing for investors in listed securities. It becomes difficult to differentiate vision from delusion.
In hindsight, it is easy to see why Apple was always going to be a great company. Similarly, Nokia, Motorola and Blackberry were great companies and would have become even greater; except that they didn’t. Of course, everyone has an explanation on how that could have been identified at the peak of their stock prices. Similarly, a well-known fast food franchisee in India and a logistics company riding on e-commerce were investors’ darlings and the great visionaries could see where they were going. Except, now they are not the darlings they were.
An alternate approach to a 100-bagger portfolio would be to not chase a stock with our own visions or delusions projected on them, but invest in a basket, or portfolio of companies, that could provide that 20-25%-plus annual return. This would be achieved by focusing on companies that have stable business models, safe balance sheets, value-creating track records and are available significantly below their intrinsic value.
A basket of such investment-grade equities would turn out to be, not a 100-bagger stock, but a 100-bagger portfolio. The chances of succeeding in identifying a portfolio that could yield 25% with this methodology is much higher. And it would be much safer as well.
Vikas Gupta is executive vice-president—traded markets and investment research, ArthVeda Fund Management Pvt. Ltd.