Investors are naturally drawn to multi-baggers, stocks that can multiply in value several times, potentially yielding significant wealth. Therefore, it’s unsurprising that Quartr’s shared image has garnered considerable attention among investors. It lists 27 companies that have returned 100 times their value over the past 15 years.
Investors would scrutinize this list, eager to discover if they own any of these stocks or to identify patterns that might help spot future multi-baggers.
Here are a few observations. Firstly, most companies on the list, such as Patrick Industries and Nexstar Media Group, are relatively unknown. What do they even do? And media sounds like it is dead?
Of course there are some familiar names like Nvidia and Netflix. But the less well-known companies outnumber the familiar ones. This suggests that the next multi-bagger is likely an obscure stock, hidden away from the mainstream investments.
Secondly, these multi-baggers may belong to specific sectors, indicating thematic drivers behind their success. For example, several belong to the semiconductor industry—Nvidia, BE Semiconductor, ASM International, and Altium. Others are in building and construction, like Patrick Industries, Builders FirstSource, and Nemetschek.
Identifying the big trend before zeroing in on individual stocks could enhance the likelihood of success.
Now, here comes the less encouraging part.
In a separate analysis of stocks that have returned 10x or more in the last 10 years—a seemingly easier feat than achieving 100x in 15 years—I found 82 such stocks in the U.S. out of 6,422. This implies a mere 1% chance of finding a 10x multi-bagger. Survivorship bias further lowers this percentage, as the total number of stocks excluded delisted or bankrupt stocks.
The challenge doesn’t end there. Even if one manages to find a multi-bagger, the question arises: when should one sell? How many investors can hold onto a position that has doubled in value? What if one sells and the stock subsequently increases tenfold? Or, conversely, what if one doesn’t sell and the stock plunges by 70%? Additionally, one must consider the market’s noise and narratives, which often portray a bleak outlook or suggest that the stocks in question are faltering. Thus, the process is a lot more difficult than it looks in a paper exercise.
Also, the median market capitalization of these 82 multi-baggers was $8.9 billion, below the S&P 500’s threshold of $14.5 billion. To catch these stocks early, one would have needed to invest when their market cap was around $890 million, typically in unfamiliar small cap stocks.
It will be challenging for most investors to allocate a significant portion of their portfolio to these unfamiliar small-cap stocks. If one only allocates a small portion and it turns out to be successful, the resulting gain may not be substantial, which defeats the purpose of seeking a multi-bagger.
Yes, a low probability doesn’t mean it’s impossible. Usually, this is indeed the case – the lower the probability, the larger the potential payout. We often hear remarkable stories of investors who identified these multi-baggers well in advance and became exceedingly wealthy. It’s possible, albeit not highly probable. Success in this endeavor requires not just skill but also a considerable amount of luck.
It’s not wrong for investors to seek out multi-baggers; this is a practice even professional investors, such as venture capitalists, often engage in. However, one should only pursue this strategy after fully understanding and accepting the risks, and after developing the abilities to overcome the challenges mentioned.
I used to look for small cap and mid cap stocks that look to possess the huge potential as highlighted above. And I agree its not as easy in reality – few wins, some losses. Moonshot targets can be blinded by the gradual leap of faith. In addition, how courageous would the investor be to invest considerable $x into these investments…in my view, it’s almost less than 3%. Thus, for me, I divert to a balanced portfolio instead.
Thanks for sharing your experience. Definitely takes a lot of guts and I wouldn’t say I have enough of that too!
Interestingly, I did took the leap of faith after designing an assessment framework but that’s for private equity. Bought into 2 of them and one is en-route towards ipo.
Congrats!
Thanks!