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.

Use This Simple Rule to Pick Winning Shares

LONDON -- When it comes to investing, it's all too easy to get bogged down in technical details and miss the really obvious clues -- the evidence of our own eyes. I've developed a simple rule that has helped me identify goodbusinesses and steer clear of bad ones.

The original 10-baggerBetween 1977 and 1990, the U.S.-based Fidelity Magellan Fund was the best-performing fund in the world. The fund's manager during this period was Peter Lynch, the man who coined the term "10-bagger."

Lynch's record as a growth investor is second to none, and in his book One Up on Wall Street, he explains how some of his most successful investments were the result of anecdotal evidence and personal experience, rather than stockanalysts' reports.

My Lynch ruleI've developed my own version of this approach, which I've found works well for a surprising number of business: If I wouldn't want be a customer of the business, then I don't want to be a part owner of it either.

This rule made selecting some of the FTSE 100 (UKX) shares that lie at the heart of my portfolio much easier. I've written before about how virtually all of us are customers ofGlaxoSmithKline (LSE: GSK.L  ) -- a company whose products are an integral part of the fabric of modern life.

On a more mundane but no less important note, I have been a regular Tesco (LSE: TSCO.L  ) customer for years. Not only is there a Tesco Express within a short walk of my house, but there's a larger store nearby, too -- and both offer the best combination of pricing and availability in my local area. Needless to say, both stores are always busy.

Similarly, my electricity and gas come from Southern Electric -- part of dividend king SSE, while much of my diesel comes from Royal Dutch Shell (LSE: RDSB.L  ) , whose sustainable 4.8% yield and massive reserves give me confidence that the company will remain an attractive investment for decades to come.

In fact, there is only one FTSE 100 company in my portfolio that breaks my rule. I am pretty sure I will never be a direct customer of defense giant BAE Systems -- but I am fairly sure the government will continue to pay BAE a portion of my tax bill every year, which should be reflected in the company's excellent dividend record.

A sporting chanceNothing illustrates the importance of keeping your eyes open when investing more clearly than Sports Direct International (LSE: SPD.L  ) and JJB Sports.

As their updates last week showed, these two companies may be in the same business, but they are operating in completely different worlds. Both chains have large stores in the town where I live and a visit to these shops is just as educational as a look at the companies' financials.

Sports Direct is always full of stock and bustling with customers -- you always have to queue at the till. JJB, on the other hand, is a similar size shop but carries about a quarter of the stock and has very few customers. You don't need to be an accountant to work out which company is in better health.

Expert adviceOne man who knows how to identify a long-term profitable business is Neil Woodford, one of the U.K.'s most successful fund managers. Between 1996 and 2011, his stock choices rose in value by 347% -- outperforming the 42% gain of the wider market by a country mile.

Neil Woodford now manages more money for private investors than any other City manager, with a whopping 20 billion pounds of our money in his hands. In the last five years alone, his High Income fund has gained 15%, more than double the 7% return of the wider market.

The good news is that you can find all the details of eight of Neil Woodford's biggest holdings in this special free report from the Motley Fool, "8 Shares Held By Britain's Super Investor."

By Roland Head

July 23, 2012

http://www.fool.com/investing/general/2012/07/23/use-this-simple-rule-to-pick-winning-shares.aspx#.UBM2g2GO2So

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. ;-)

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.

Multi-baggers

"The majority of the multi-baggers owe their stellar returns to the market “re-rating”, rather than an impressive expansion in their earnings."


The above statement is probably true for the short term.  However, over the long term, multi-baggers are the result of their long term earnings growth.

Performance of Top Glove since listing

Low Price in 2001: 0.27 (Price Range: 0.27 - 0.61)
Low Price in 2009: 3.58 (Price Range: 3.58 - 7.50)
Investing Period: 8 years

Over the course of 8 periods your investment grew from $0.27 to $3.58, its compound annual growth rate, or its overall return, is 38.14%.

Price increased 13.3 x, giving a gain of 1230%.

-----

High Price in 2001: 0.61 (Price Range: 0.27 - 0.61)
Low Price in 2009: 3.58 (Price Range: 3.58 - 7.50)
Investing Period: 8 years

Over the course of 8 periods your investment grew from $0.61 to $3.58, its compound annual growth rate, or its overall return, is 24.76%.

Price increased 5.8 x, giving a gain of 480%.

-----

High Price in 2001: 0.61 (Price Range: 0.27 - 0.61)
High Price in 2009: 7.50 (Price Range: 3.58 - 7.50)
Investing Period: 8 years

Over the course of 8 periods your investment grew from $0.61 to $7.50, its compound annual growth rate, or its overall return, is 36.84%.

Price increased 12.3 x, giving a gain of 1130%.

-----

Low Price in 2001: 0.27 (Price Range: 0.27 - 0.61)
High Price in 2009: 7.50 (Price Range: 3.58 - 7.50)
Investing Period: 8 years

Over the course of 8 periods your investment grew from $0.27 to $7.50, its compound annual growth rate, or its overall return, is 51.52%.

Price increased 27.8 x, giving a gain of 2680%.

-----

CAGR essentially smoothes out the progress of your investment over a period of time, providing a clearer picture of your annual return. However, although your investment started at $0.27 and ended with $3.58, its growth in any one year may have been quite a bit higher or even negative (if the investment ever lost money over that time). Consequently, the CAGR figure may give the impression that the investment has produced a stable return throughout its life, even if the investment was extremely volatile, fluctuating a great deal from year to year.


The above illustrates the importance of buying at a low price. Buying at a low price provides a margin of safety and magnifies the gains.

Challenges:

How can you spot a similar stock early in its business life?
Will you be able to put a large investment into such a stock?
Will you be able to stay the course without selling out, to capture all the gains from compounding at rates ranging from 24.76% to 51.52%?

Turning $37.50 into $900,000.00+ ...

Turning $37.50 into $900,000.00+ ...

Sunday April 26, 2009

According to the most recent Fortune Magazine, which is dedicated to the annual Fortune 500, "If you'd bought a single share [of Johnson & Johnson] when the company went public in 1944 at its IPO price of $37.50 and had reinvested the dividends, you'd now have a bit over $900,000, a stunning annual return of 17.1%." On top of that, you'd be collecting somewhere around $34,200 per year in cash dividends!

The article goes on to say, "Even if you hadn't reinvested the dividends, that single share would now be 2,500 shares as a result of splits, and you'd be collecting dividends of $4,500 a year from that $37.50 investment. If only Grandpa had bought 100 shares."