Multi-bagger or Falling knife.

 "The best thing that happens to us is when a great company gets into temporary trouble ....  We want to buy them when they are on the operating table."

Warren Buffett

(e.g. American Express)

"A stock that has fallen 90% is a stock that fell 80% first and then halved."

(e.g. Valiant bought and sold by Bill Ackman)

Reasons for steep falls

• Leveraged financials and loan/other losses.
• Food and other consumer products - safety, ingredients, etc.
• Victim of fraud
• Perpetrator of a fraud
• Unethical / Illegal behaviour
• Loss of key customer / product segment/ market
• Regulatory issues

Beware of COMMITMENT BIAS when you already own a stock.  

This is a difference between the buying of American Express by Warren Buffett (putting 40% of his fund in this company) and not selling and buying more of Valiant by Bill Ackman.   These are high risk, high return situations which can have extreme results (binary event).

Beware of LEVERAGED FINANCIALS

In banks, shareholders' money is 8% to 10% of its assets.  90% are borrowed money.   A slight mistake can wipe out shareholders' money.  Steep losses seen in bank, investors should avoid it like the plaque.

(e.g Deutch bank)

Food / Consumer brands - SPEED BUMPS?

Unintentional loss at the quality level that can be rectified.  (eg,  lead content in Maggi noodles of Nestle).   These companies are not leveraged and usually bounds back in one or two years after taking a hit.  These are buying opportunities.  Speed bumps and not end of the road catastrophe.

Gangrene amputation pattern

Maybe alright to participate in the surviving business after the "bad segment" is disposed.

Drug companies involved in law suits due to side effects, generally avoid.  Outcome is uncertain.  If it is just technical or production issues, maybe an opportunity to own, as these are usually temporary and solvable.

Unethical / Illegal Behaviour

Wells Fargo beefed up its top and bottom lines through hard selling a few years ago.  This unethical behaviour led to its stocks being hammered down.  Is this a great company?  Is the event a temporary threat to its business or a permanent life threatening catastrophe event to its existence?

B2B Quality / Other Issues

Foxconn workers committing suicide in China.  Is this a temporary issue or is it a life threatening existential threat?   This will guide you whether to buy or not.

Product quality issues.  How many customers have run away?  1 customer or many / all customers.

Solution is product recall and replace.  Example recall in cars due to certain defects.  Temporary issue.

Additional notes:

September 2016

Wells Fargo's fake accounts scandal surfaced in September 2016, revealing that employees at the San Francisco-based bank had opened millions of fraudulent accounts, often to meet sales goals.

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

A quick look at Latexx

A quick look at Latexx
http://spreadsheets.google.com/pub?key=tCBaT5VvGDp2xCY3zXOPcLQ&output=html

Read an analyst who mentioned that this company may target an earning of RM 100 million in a year's time.  How probable is this?   Your speculative guess is as good as mine. ;-)

A quick look at HaiO

A quick look at HaiO
http://spreadsheets.google.com/pub?key=tZTHquircxQhaACs6-m-uRA&output=html

Those who bought this stock the last 2 years would have been rewarded with multiple baggers of gains.  It remained undervalued a year ago.  Now that the story of HaiO is out in the market, the price of the stock has risen sharply.

The valuation today compared to exactly a year ago makes compelling comparison for the value investor.  A year ago, its PE was 7 and now it is 11.8.  Its dividend yield for last year was 7.49%, now it is nearer 2,24%.

Picking Your Own Stocks

If you have the time and the inclination, you can embark on a thrilling lifetime adventure:  picking your own stocks.

This is a lot more work than investing in a mutual fund, but you can derive a great deal of satisfaction from picking your own stocks.  Over time, perhaps, you'll do better than most of the funds.

Not all your stocks will go up - no stockpicker in history has ever had a 100% success rate. 

Warren Buffett has made mistakes, and Peter Lynch could fill several notebooks with the stories of his.  But a few big winners is all you need.

If you own 10 stocks, and 3 of them are big winners, they will more than make up for the 1 or 2 losers and the 6 or 7 stocks that have done just OK.

If you can mange to find a few triples in your lifetime - stocks that have increased threefold over what you paid for them - you'll never lack for spending money, no matter how many losers you pick along the way. 

And once you get the hang of how to follow a company's progress, you can put more money into the successful companies and reduce your stake in the flops.

You may not triple your money in a stock very often, but you only need a few triples in a lifetime to build up a sizeable fortune.

Here's the math:

If you start out with $10,000 and

• manage to triple it 5 times, you've got $2.4 million, and
• if you triple it 10 times, you've got $500 million, and
• 13 times, you're the richest person in America.

Multiple baggers in KLSE

Here is a spreadsheet of the top multiple bagger stocks in KLSE for the 10 year period from 1999 to 2009.

http://spreadsheets.google.com/pub?key=t_fTtRGB_8FXvEh7RIPU_pQ&output=html

There are only 2 ten baggers over this period, namely Top Glove and Mah Sing. A close third is IOI Corp.

All multiple baggers give dividend in varying amounts. Among these multiple baggers, DLady, PBB and PPB occupy the top 3 places in terms of dividend yields.

A doubling of a share price of $1 to $2 equates to a gain of 100%. Another doubling of the share price from $2 to $4 equates to a gain of 300%. Doubling again from $4 to $8, gives a gain of 700%.

Having a 10 bagger in your portfolio equates to a gain 900%. That means the share have at least doubled more than 3x from its initial share price, thus, 2 x 2 x 2 x ... .

It is therefore not surprising that a 10 bagger is a rarity over a short investing time frame. Moreover, a 10 bagger over a 10 year investing period (1999 - 2009) is a rare event in KLSE as per data above. Although it is possible over a very long time frame, many investors would have sold off the stocks to capture the gains much earlier.


Did you recently ride on this 10 bagger depicted below?