- A mutli-bagger is a stock that doubles or more. These stocks are great to own, but not that easy to find. We’ll discuss the necessary mindset to take advantage of such opportunities.
- Apart from the mindset, it’s also necessary to understand the environment and look to places where multi-baggers can be found.
- The final decision comes down to how much of your portfolio should be allocated to such investments.
There are different reasons why people invest.
Some invest to protect their capital from inflation, others to build up a retirement nest egg, while others seek extraordinary returns.
If you’re the type of person that is looking for significant life tailwinds coming from your investments, this is the article for you. I’ll discuss three practical ways you can invest and expect your money to double or more, in a manner that is much quicker than what the S&P 500 offers at this point as anyone invested in index funds will have to wait more than 20 years to see their money double.
Stocks that offer the potential to double or more are usually called multi-baggers.
The Necessary Mindset For Investing In Multi-Baggers
Before discussing actual examples, let’s first look at the mindset surrounding multi-bagger investments as there are a few components you must understand before investing.
- You have to be ready let your investment grow. Many invest in something that has the potential to quadruple and then sell after a 10% gain. I personally know many who have invested in Amazon (NASDAQ: AMZN) that way over the past two decades, and now cry over the missed opportunity to retire early. The mindset with multi-baggers is essential, tell yourself that this is the part of your portfolio that is there for extraordinary returns and let them evolve over time. Don’t sell too early or at the first sign of bad news.
- Investments that lead to multi-bagger returns are always out of favor with the mainstream. This is what makes them cheap and gives them potential. Companies that are liked by everyone usually have high valuations and will deliver mediocre returns at best. That doesn’t mean multi-baggers have to be risky and that you could lose money. There certainly are very risky investments, but multi-baggers don’t have to be risky at all. The largest risk to the intelligent investor is time as it could take a while before the stock develops as planned.
- There is no guarantee and nobody knows when the doubling or tripling will happen. Therefore, the amount invested should be something you really don’t need and the only purpose of the investment is to provide something luxurious when the investment delivers. Think of a bigger house, a trip around the world, or the classic car you’ve always wanted. The key is to be sure that until the money doubles or more, you are still happy living the way you live now.
What Are We Looking For?
In order to find multi-bagger investments, you need to know what to look for and where to look for it. Through a few examples, I’ll describe potential multi-bagger opportunities.
Investing in growth sectors not yet recognized by the markets.
Think of TSLA in 2013. It was just a small company experimenting with electric vehicles, and now it’s market cap is bigger than some of the big 3 car manufacturers.
Figure 1: TSLA’s stock price over the past 5 years, up 10 times. Source: CNN.
A multi-bagger can be found in growth sectors that are about to become mainstream, but you have to invest in such sectors before everybody else invests.
A great sector to look for such investments is in 5G technology. Everything is about data these days, and 5G technology could really disrupt the way we communicate because there is so much more that can be communicated, from autonomous driving to constant health checks, etc. Thus, as the technology will allow for data to travel much better and into many more places than mobile phones, related stocks could really be potential multi-baggers.
Another growth sector will be electric vehicle related sectors that haven’t yet felt the change. Here I’m talking about related materials. You can read our articles on nickel and copper which will give you an excellent idea of where the future lies for these metals.
Investing where there is blood in the streets.
If the investments in the previous section are cheap because they aren’t yet recognized by the market, this section talks about those investments that have been recognized in the past but are currently in a slump and nobody wants to touch them with a 10-foot pole.
A perfect example of such a sector is commodities over the last few years. In January 2016, nobody wanted to come close to copper as an investment and the price of the metal fell below $2 per pound. This was clearly an overreaction as industrial demand continued to grow steadily throughout the whole downturn. The current price of copper is already much higher so it’s possible to find such investments, but you have to be both quick and brave to take advantage of the situation.
For example, one copper miner, Freeport-McMoRan (NYSE: FCX), has quickly tripled from January 2016 lows, but you would have had to have had the courage to invest in the stock that had previously only been in decline.
Figure 2: FCX’s stock price in the last 5 years. Source: CNN.
In investing, courage is highly correlated to knowledge, so keep reading Investiv Daily as we share our research and investing insights every day.
The best ways to spot a bottom in a beaten-down sector like commodities is to follow production costs and global supply and demand. You can find more about how to do this in our article on how to invest in commodities.
Apart from commodities, emerging markets often offer similar trading patterns. A market that still hasn’t recovered from the past crash is the Chinese stock market, and we can expect more euphoric periods as the stream of good news continues from China.
Figure 3: The Chinese stock market is still far from previous peaks and it’s cheap. Source: Bloomberg.
Take advantage of black swans.
A black swan is a situation unfolding that nobody forecasted or expected. However, black swans happen all the time, just think of BREXIT, the European debt crisis in 2012, the global financial crisis in 2009, the dot-com bubble, the Asian crisis, etc. All of those situations made a significant impact on lots of securities, and go to prove that you can increase your investment many times over by carefully anticipating what the chance of a black swan happening is. This usually doesn’t cost much as the probability is very small.
For example, in 2013, very few forecasted oil prices below $50 in 2015, thus buying long term put options on oil stocks would have brought in extreme returns. This is a strategy that requires a strategic approach as the investment will be lost many times, but just a few correct plays will cover the losses many times over.
A black swan investment with no expiration option would be gold miners. Given that when the next recession arrives central banks are going to print even more money, gold prices will rise significantly. When this happens, the stock prices of gold miners will increase exponentially.
Goldcorp’s (NYSE: GG) stock price went from $3 in 2000 to over $55 in 2011 as central banks increased their balance sheets and lowered interest rates.
Figure 4: Goldcorp’s stock price since 2000. Source: Yahoo Finance.
The next time we see quantitative easing strategies, we can expect similar stock price behaviors from gold miners.
We Should All Look For Multi-Baggers
The beauty of investing is that if you don’t use leverage, the most you can lose is what you invested while the upside is unlimited. No matter what kind of investor you are, I think we should all embrace at least some multi-bagger exposure in our portfolios.
The portfolio exposure should depend on your age and risk appetite. However, especially if you learn how to let a multi-bagger grow, I wouldn’t be surprised to see the multi-bagger become the largest portfolio position in the next 10 years even if it’s now in the low single percentage digits. We live in a very extremist world where the few take most of the cake, therefore, look for winners as you’ll only need a few of them in a life time.
Thankfully, the world is changing so fast that if you missed some of the previous multi-baggers—like Facebook, Nvidia, Amazon, Netflix, Teck Resources, or others—don’t worry, there will be plenty more to come.