Enduring multi-baggers and Transitory multi-baggers.

Stocks for the long run.

The power of compounding is truly remarkable, almost magical for those with the ability to identify these companies with earnings power over the long term.

Do you know that DLady was priced RM 1.60 per share, Nestle RM 6 to RM 8 per share and Petdag RM 2.00 per share in the 1990s?

Today, DLady is RM 23.00 per share, Nestle is RM 120.00 per share and Petdag is RM 22.00 per share.

The prices of these stocks have dropped from their highest.  DLady has dropped from its historical high price of RM 75.00 per share.  Nestle has dropped from its high of RM 160+ per share.  Similarly, Petdag has dropped from its high price of RM 30+ per share a few years ago.

DLady has dropped a lot and there are various reasons for these. 

How can you exploit any opportunities depend on how you approach your investing. 

Enduring multi-baggers and Transitory multi-baggers.

ENDURING multi-baggers are those companies whose wealth creation is long-lasting and correction from the peak valuation is limited.
In fact, they continue to exist as multi-baggers even after the correction.
The enduring multi-bagging companies are typically few and difficult to be spotted, and most of the time they appear to be expensive at the time of buying because of the lack of faith in their longevity and size of growth.


TRANSITORY multi-baggers, on the contrary, are easier to be spotted but they always end up giving nasty end results.
Corrections are typically almost 100 per cent.
Cyclicals broadly come under this category.
The tragedy with this class of companies is that if you cannot sell in time, nothing is left in your hand.
But as correction is inevitable, market as a whole is left high and dry with a bad experience.
These companies are plenty and easy to be found, and they attract a lot of crowd.

Ten-baggers operate in growth industries.

Ten-baggers are shares where you make 10 times your money (I believe the phrase is derived from baseball). Such opportunities are rare, but I have been fortunate enough over the years to be involved in a few such situations: DLady, Nestle, Petdag and others.

There tend to be some common characteristics among these winners. The businesses all operate in growth industries and the company in question must be able to grow the top line. No one ever made a tenfold return on a pure margin improvement, or cost-cutting story with no sales growth.

Turnarounds are, however, a rich source of 10-baggers. For these to work, one's timing has to be immaculate, and the underlying business has to be sound - just desperately unloved by the stock market.

Patience is needed.

Such returns need patience. A hedge fund that churns its holdings every few months will never enjoy a 10-bagger. And therein lies the greatest danger: selling too early to enjoy the 1,000 per cent gain.

When you have doubled or trebled your money, it is so tempting to cash in profits. It must have been tempting in the early 1950s to take profits on Glaxo shares, just a few years after their 1947 flotation. Or to have done the same for Tesco which floated in the same year. Or sell Racal in the late 1960s after its 1961 market debut, decades before it spun off Vodafone. Yet each of those shares rewarded patient investors with epic performances over many decades, all 20-baggers at least, not even allowing for dividend.

One of the advantages that private equity enjoys is that it is forced to take a reasonably long-term view, and so is usually unable to rush for the exit at the first opportunity. Venture capital's other edge over quoted investors is debt: gearing in successful situations always amplifies the return to equity-holders. Typically, buy-outs have structures where 70 per cent of the capital is borrowed.

Quoted companies probably have the reverse capitalisation, with equity providing three-quarters of the funding. And as ever in investing, those who regularly find 10-baggers say you should stick to your own sphere of competence: buy what you understand.

Usual rules apply:  Quality, Management & Valuation

But the usual rules apply: look for real companies with competent management and a proven business model.

You won't find a 10-bagger among much of the over-hyped, speculative froth. Search for the solid operation with strong fundamentals and a high quality of earnings.

Very few acquisitive vehicles are 10-baggers. Management in such firms focuses on doing deals rather than organically growing its core business. This can produce reasonable returns, but rarely delivers the stellar, long-run performance that can come from a strong business franchise in an attractive niche. 

And balance sheets matter: 10-baggers must be able to fund expansion internally or through debt. Companies that are forever issuing equity dilute their stock performance.

So good luck in your search for the next blockbuster. It may well be an obscure, neglected company now, but with the potential for greatness. The secret is to spot that potential.

Definition of 'Tenbagger'

Definition of 'Tenbagger'

A stock whose value increases 10 times its purchase price. This expression was coined by Peter Lynch, one of the greatest investors of all time, in his book "One Up On Wall Street" (1989).

Investopedia explains 'Tenbagger'

These types of returns are considered once-in-a-lifetime investments. Some of the most famous examples of tenbaggers include now blue-chip stocks like Wal-Mart, Hewlett-Packard and General Electric. Many investors are constantly in search of the elusive tenbagger, but there isn't an exact science to discover tenbagger stocks. Generally, these explosive companies are smaller companies (market cap under $1 billion) with large potential markets. Over time, these companies grow into their potential markets, providing patient investors with handsome returns.

Read more: http://www.investopedia.com/terms/t/tenbagger.asp#ixzz29TLSeRzN



Where did the term "tenbagger" originate?

On February 15, 1989, Peter Lynch's investing book, "One Up On Wall Street", made its debut. At the core of the book was a call to arms for individual investors. Lynch believed that individual investors could outperform highly educated Wall Street stock pickers by keeping their eyes open during their daily life and learning basic research skills. Lynch pointed out that, as consumers, workers, mothers and fathers, individual investors are much closer to the market than the people in Wall Street's ivory towers. When new products are introduced or new businesses opened up, consumers get first-hand information that Wall Street firms wait months for analysts to come up with.

Lynch explained that once a stock becomes noticeable enough to make the institutional approved list, most of the gains have already happened. He coined the term tenbagger to describe a stock that returns ten times the money that you put into it and gave numerous examples of ten, twenty, and even fortybaggers that individual investors could've spotted before Wall Street jumped in. These include everything from Dunkin' Donuts, Wal-Mart, The Limited and Stop & Shop. Lynch showed that Wall Street funds came in late on the majority of multi-baggers, seeing only a small percentage of the overall gains.

Boiled down to two precepts, "One Up On Wall Street" tells investors to invest where they have an edge in knowledge and keep up with the "story" of their stocks. Lynch didn't want investors to blindly buy companies that they encountered in their daily lives, but he suggested that those companies were the best place to start looking for great stocks rather than searching in an industry that they knew nothing about. He also emphasized the need to create a storyline for a company and keep up with any changes in that story so that investors can eliminate the market noise before deciding to buy or sell. The mixture of real world examples and practical advice made Lynch's book a classic and it continues to be a source of inspiration and instruction for individual investors today.

For more, read Pick Stocks Like Peter Lynch.

This question was answered by Andrew Beattie.

Read more: http://www.investopedia.com/ask/answers/09/tenbagger-peter-lynch.asp#ixzz29TOJzaAi

How to Find 10-Baggers

By Jeremy Bowman
September 14, 2012

In 2006, I took a small amount of money from my bank account and bought some shares of Chipotle Mexican Grill (NYSE: CMG  ) .

I wish I would have pawned all my worldly possessions along with those of my friends and family. The stock gained nearly 10 times its original value in just six years, climbing from about $45 to a peak of $440, before stumbling after its recent earnings report.

When I bought Chipotle, I didn't do any thorough financial analysis or even look at its P/E ratio, but I knew it was a great company, having visited their stores several times, and I knew it had just IPO'd so it seemed like a great time to buy. Going to college in Colorado, Chipotle's home state, gave me an advantage over other investors as I had early access and awareness of the company as well as the ability to see its popularity among my classmates, who raved about it. It seemed clear to me that this company was bound for success.

Recalling that experience, I decided to look back and see what lessons I could learn as I search for the next 10-bagger. The following are three key factors that I think investors should look for.

1. Mass appeal
Peter Lynch famously encouraged investors to "buy what you know" -- whether that knowledge is geographical, job-related, or something else -- as this is one of the best ways to find an advantage over the market. Simply paying attention to what products people are raving about and what companies are just better than the competition can be one of the first hints of a multibagger.

For example, I don't see a lot of corporate logos on car bumpers, but I've noticed that Apple(Nasdaq: AAPL  ) and lululemon athletica (Nasdaq: LULU  ) have gained legions of devotees based on this unscientific survey. It's no surprise, then, that their shares have gone through the roof. Lululemon is up more than 30 times from its bottom after the financial crisis, and though Apple's been around since the '70s, shares of the company could still be had for $7 back in 2003, when the iPod was first gaining popularity. While it may be have impossible to extrapolate the iPhone and the iPad and the remarkable success that would come with them from just the iPod, it was clear that Apple had a hugely popular, revolutionary product on its hands. This was no longer the same old second-place computer maker from the 1990s. The iOS ecosystem is what's made Apple the most valuable company ever, and that began with the iPod and iTunes.

Other companies that have exemplified these characteristics include Under Armour, whose logo has become as ubiquitious as the Nike swoosh, and Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , whose Keurig coffeemaker had turned it into a juggernaut before the recent tumble on patent cliff concerns.

2. Growth potential
This part may seem obvious, as pretty much every publicly traded company is focused on growth, but some parts bear explaining.

Stocks can appreciate in two ways: earnings growth or valuation. Of course, earnings growth is preferred, but an increasing P/E ratio is often a sign of a highly regarded brand such as the ones identified above and should not necessarily be a cause for concern.

Look for companies with a growth rate of 25% or more and with plenty of room to expand. In retail, using companies such as Chipotle or Lululemon as an example, this can be as simple as looking at store counts. Considering both companies have just a fraction of the locations of larger competitors McDonald's or Gap, it seems they should be able to grow revenue for years to come as long as their products remain popular.

Growth potential with consumer goods companies can be more difficult to gauge. Look for a low market share, new products in the pipeline, and opportunities abroad. Apple's iPhone, for instance, still has a relatively low market share despite trouncing the competition in profits.

Perhaps the best example of a company that keeps generating new growth opportunities is Amazon.com (Nasdaq: AMZN  ) . Though its consistent top-line advances have not fed earnings, the company has repeatedly redefined industries and invented new opportunities for itself, whether they be in digital media, mobile hardware, or creative bundling services like Amazon Prime. It's those opportunities that make it the only company of its size that could justify a P/E of 300, and why its shares are worth than 100 times what they were when they came on the market.

3. Size
Finally, the third quality to look for in a potential 10-bagger is the right size. Companies like Apple and Amazon clearly have mass appeal and growth potential, but are too big already to grow 10 times in size. Even most of the other companies listed above are already worth around $10 billion in market value, and considering only a small list of companies have reached $100 billion, it seems like we should be looking at smaller targets.

A market cap of around $1 billion seems like an ideal size for a potential 10-bagger. Companies this big are small enough to have room to grow, since $10 billion is a reasonable goal for most publicly traded businesses, but they're also big enough to have proven themselves, have a track record, and are generally profitable.

Chipotle, Lululemon, Green Mountain, and Netflix were all in this $1 billion range before their shares took off. For young growth companies, that cusp seems to be a good indicator of when to invest.

Now that we've examined the primary factors to use in identifying potential 10-baggers, I'll next take a look at a few stocks that fit these criteria. Click here for my next article, where I'll discuss stocks that I think could become 10-baggers.

http://www.fool.com/investing/high-growth/2012/09/14/how-to-find-10-baggers-.aspx

How to pick Multi-Baggers

"To achieve satisfactory investment results is easier than most people realise; to achieve superior results is harder than it looks."
- Benjamin Graham

Here are the key lessons from a study:
■Bad businesses can never create a multi-bagger, though they can create transitory multi-baggers during short phases when the conditions are good.
■Bad managements with good businesses are likely to create only transitory gainers.
■Overpriced shares have no chance of becoming multi-baggers ever.

So the only way one can hope to find lasting multi-baggers is by buying into great businesses run by good managements purchased at huge margin of safety.



Why some multi-baggers destroy wealth eventually
Having said that, it is not that one could get rich for ever by buying multi-baggers. The study says there are two types of multi-baggers: 

• Enduring multi-baggers and 
• Transitory multi-baggers.

Enduring multi-baggers are those companies whose wealth creation is long-lasting and correction from the peak valuation is limited.

• In fact, they continue to exist as multi-baggers even after the correction.
• The enduring multi-bagging companies are typically few and difficult to be spotted, and 
• most of the time they appear to be expensive at the time of buying because of the lack of faith in their longevity and size of growth.

Transitory multi-baggers, on the contrary, are easier to be spotted but they always end up giving nasty end results.

• Corrections are typically almost 100 per cent. 
• Cyclicals broadly come under this category. 
• The tragedy with this class of companies is that if you cannot sell in time, nothing is left in your hand.
• But as correction is inevitable, market as a whole is left high and dry with a bad experience. 
• These companies are plenty and easy to be found, and they attract a lot of crowd.

The result reveals that most of the multi-baggers were transitory in nature during this period and they threw back all the wealth that had been created on their journey upwards.




What is the winning strategy?
"Stocks are simple. All you do is buy shares in a great business - with managers of the highest integrity and ability - for less than the business is intrinsically worth. Then you own those shares forever."
- Warren Buffet


In essence, weak managements will lead only to transitory gainers whereas good managements can shine only if business performance helps.


As per Warren Buffet: "With a few exceptions, when management with a reputation for brilliance tackles a business with a reputation for poor fundamentals, it is the reputation of the business that remains intact."


So it boils down to the fact that for the making of enduring multi-baggers, a good business with a good management is necessary.





Price/value:


"Have the purchase price be so attractive that even a mediocre sale gives attractive returns."
- Warren Buffet


One factor, which is absolutely important for making a multi-bagger, is gross under-valuation or huge margin of safety in price at the time of purchase.


Some of the pointers to under-valued stocks are one or more of the following:
■Low price in relation to asset value
■Low price in relation to earnings and cash flows
■Sustained purchase by insiders
■A significant decline in stock prices
■Small market capitalisation with growth


Also, the best time to get a huge margin of safety is when:
■Business conditions are unfavorable and near-term prospects look poor.
■When low prices of stocks reflect the current pessimism either in a particular stock or in the market as a whole.
■When a large company's performance is hit and the pessimism is fully reflected in the price.


Low P/E and P/B works because:
■The reinvested earnings are substantial in relation to the price paid. The effect of large earnings addition year after year keeps adding to the intrinsic strength of the stock and, hence, can't be ignored by the market for long.
■The bull market is typically very generous to low-priced issues and thus will raise the typical bargain issue to at least a reasonable level.
■There could be chances of smaller companies with high earnings being taken over by larger ones as a part of diversification programme.


http://myinvestingnotes.blogspot.it/2009/09/how-to-pick-multi-baggers.html

The Investment Secrets of Warren Buffett

BRINGING IT ALL TOGETHER

The remarks of Warren Buffet and analysis by Buffett authors suggest that, at the very least, Warren Buffett looks at the following aspects of a corporation and its operations. They can be put in the form of questions that any sensible investor should ask before considering a stock investment.

BASIC QUESTIONS TO ASK

1. Does the company sell brand name products that are likely to endure?
2. Is the business of the company easily understood?
3. Does the company invest in and operate businesses within its area of expertise?
4. Does the company have the ability to maintain or increase profitability by raising prices?
5. Is the company, looking at both long-term debt, and the current position, conservatively financed?
6. Does the company show consistently high returns on equity and capital?
7. Have the earnings per share and sales per share of the company shown consistent growth above market averages over a period of at least five years?
8. Hs the company been buying back its shares, and if so, has it bought them responsibly?
9. Has management wisely used retained earnings to increase the rate of return to shareholders?
10. Is the company likely to require large capital sums to ensure continuing profitability?

See case studies.

This would only be the first stage of the process. The next, and most important question, is determining the price that an investor such as Warren Buffet would pay for the stock, allowing for the margin of safety.

http://www.buffettsecrets.com/bringing-it-all-together.htm

In 1992, Warren Buffett said that:

‘Leaving question of price aside, the best business to own is one that over an extended period can employ large amounts of capital at very high rates of return. The worst company to own is one that must, or will, do the opposite – that is, consistently employ ever-greater amounts of capital at very low rates of return.’

****Growth stocks as a class has a striking tendency toward wide swings in market price (II)

The striking thing about growth stocks as a class is their tendency toward wide swings in market price.

But is it not true, that the really big fortunes from common stocks have been garnered by those 

• who made a substantial commitment in the early years of a company in whose future they had great confidence and 
• who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?

The answer is "Yes."  

Click to see:
10 Year Price Chart of Top Glove

But the big fortunes from single company investments are almost always realised by persons who have a close relationship with the particular company - through employment, family connection, etc. - which justifies them

• in placing a large part of their resources in one medium and 
• holding on to this commitment through all vicissitudes, despite numerous temptations to sell out at apparently high prices along the way.

Click to see:
5 Year Price Chart of Top Glove
2 Year Price Chart of Top Glove
1 Year Price Chart of Top Glove
6 month Price Chart of Top Glove
3 Month Price Chart of Top Glove
1 Month Price Chart of Top Glove


An investor without such close personal contact will constantly be faced with the question of whether too large a portion of his funds are in this one medium. 

Click to see:
5 Year Price Chart of Top Glove
2 Year Price Chart of Top Glove
1 Year Price Chart of Top Glove
6 month Price Chart of Top Glove
3 Month Price Chart of Top Glove
1 Month Price Chart of Top Glove


Each decline - however temporary it proves in the sequel - will accentuate his problem; and internal and external pressures are likely to force him to take what seems to be a good profit, 


Click to see:
5 Year Price Chart of Top Glove
2 Year Price Chart of Top Glove
1 Year Price Chart of Top Glove
6 month Price Chart of Top Glove
3 Month Price Chart of Top Glove 
1 Month Price Chart of Top Glove 

but one far less than the ultimate bonanza.

Click to see:
10 Year Price Chart of Top Glove



Comments:

1. Be a good stock picker.  
2. Think as a business owner.
3. Always look at value rather than the price.  Do the homework.
4. Buy and hold is alright for selected stocks.
5. Compounding is your friend, get this to work the magic for you.
6. Mr. Market is there to be taken advantage of.  Do not be the sucker instead.  BFS;STS.
7. Always buy a lot when the price is low.  Doing so locks in a higher potential return and minimise the potential loss.  But then, if you have confidence in your stock picking, you would have picked a winner - it is only how much return it will deliver over time.
8. Never buy when the stock is overpriced.  Not observing this rule will result in loss in your investing.  This strategy is critical as it protects against loss.
9. It is alright to buy when the selected stock is at a fair price.
10. Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the the price is still obviously too high.
11. Do not time the market for such or any stocks.   Timing can increase returns and similarly harms the returns from your investment. It is impossible to predict the short term volatility of the stock, therefore, it is better to bet on the long-term business prospect of the company which is more predictable. 
12. By keeping to the above strategy, the returns will be delivered through the growth of the company's business. 
13. So, when do you sell the stock?  Almost never, as long as the fundamentals remain sound and the future prospects intact.    
14. The downside risk is protected through only buying when the price is low or fairly priced.  Therefore, when the price is trending downwards and when it is obviously below intrinsic value, do not harm your portfolio by selling to "protect your gains" or "to minimise your loss."  Instead, you should be brave and courageous (this can be very difficult for those not properly wired)  to add more to your portfolio through dollar cost averaging or phasing in your new purchases.  This strategy is very safe for selected high quality stocks as long as you are confident and know your valuation.  It has the same effect of averaging down the cost of your purchase price.  However, unlike selling your shares to do so, buying more below intrinsic value ensures that your money will always be invested to capture the long term returns offered by the business of the selected stock.
15. Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.  Tactical dynamic asset allocation or rebalancing involves selling at the right price and buying at the right price based on valuation.  Assuming you can get your buying and your selling correct 80% of the time;, to get both of them right for a profitable transaction is only slightly better than chance (80% x 80% = 64%).  Except for the extremes of the market, for most (perhaps, almost all of the time), for such stocks, it is better to stay invested (buy, hold, accumulate more) for the long haul.
16. Sell urgently when the company business fundamental has deteriorated irreversibly. (Reminder:  Transmile)
17. You may also wish to sell  should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality.  However, unlike point 14, you can do so leisurely.
18. In conclusion, a critical key to successful investing is in your stock picking ability.  To be able to do so, you will need to acquire the following skills:

• To formulate an investing philosophy and strategy suitable for your investing time horizon, risk tolerance profile and investment objectives.
• The knowledge to value the business of the company.  
• The discipline to always focus on value.
• The willingness to do your homework diligently.
• A good grasp of behavioural finance to understand your internal and external responses to the price fluctuations of the stock in the stock market.
• A good rational thinking regarding the risks (dangers) and rewards (opportunities) generated by the price fluctuations of the stock in the stock market.

Top Glove Insider action:

Tan Sri Dr. Lim Wee Chai

Disposed 26/1/2007 100,000
Acquired 14/2/2007 34,540,661 (Bonus issue)
Disposed 6/4/2007  6,300,000
Acquired 9/5/2007 1,000,000
Acquired 22/6/2007 500,000
Acquired 12/7/2007 438,900
Acquired 18/7/2007 403,900
Acquired 25/7/2007 157,200
Acquired 12/9/2007 200,000
Acquired 18/9/2007 580,000
Acquired 24/3/2008 50,000
Expiration of ESOS-options 29/4/2008

(The only ESOS-option not converted and expired were those noted on 29/4/2008.  After this date, Mr. Lim continued to convert ESOS-options at regular intervals and did not buy or sell other shares of his company.  The large sale of shares in 6/4/2007 followed the large bonus issue Mr. Lim acquired on 14/2/2007.)

Click to see:
5 Year Price Chart of Top Glove
10 Year Price Chart of Top Glove

From the price chart of Top Glove, we can draw the following points:

The price of Top Glove peaked at around $14 at the beginning of January 2007.
It dropped to around  $9 in February 2007.
In April 2007, the price was around $9.20 when Mr. Lim sold 6,300,000 shares; he did not sell at the highest price possible.
In May 2007, the price was around $8.95, Mr. Lim bought back 1,000,000 shares.
The share price continued dropping to $6.00 in September 2007; Mr. Lim bought back 580,000 shares.
Mr. Lim continued to buy from May 2007 to September 2007 a total of 2.9 million shares.
It was obvious that even Mr. Lim phased-in his buying of the shares at various prices, rather than timing the buying of his shares at the lowest price.