Majority of the small cap investors are trying to find next multibagger stock to make huge money and retire at a serene location as depicted in the picture. It makes perfect sense, after all getting 100x returns can do wonders to your personal wealth. But getting multibagger returns are easier said than done. Not only because it’s difficult to find a multibagger stock but also due to other challenges. Many stock advisory services also lack a crucial element in their approach and thus investors never receive multibagger returns even with a paid stock advisory service. At AI, we believe in making investing simpler for investors & this post is dedicated to highlight major challenges which keeps multibagger returns away from many of us. It includes a unique challenge which most stock advisory companies will shy away from telling you.
This article assumes that you are already educated about the basics of finding a multibagger stock, if you are not, please go through our earlier post on that by clicking here. Proceeding forward, once you have identified a stock as a potential multibagger, there are various challenges which you need to overcome in order to receive multibagger returns.
a) Focused Process: Multibagger are like gems in a huge ocean. Simple way can be to boil the whole ocean & pick gems. This is obviously not practical at all. You must have an investment process which is focused and based on solid parameters. In the absence of a focused process, it is very likely that even if you invest in a multibagger stock, you may exit at some stage due to either lack of process or focus on too many things. If needed, you can outsource this part to a good stock advisory service provider.
b) Spread your investment: To find a multibagger, you should do investment into a number of small or tiny cap stocks so that your chances of hitting a few multibagger increases. You can do so by investing a fixed amount of test money (1k or 5k) into each of these stocks. Once some of them start showing a signs of a multibagger in making, you can increase your investment. It never harms to invest gradually as compared to invest heavily in one go. If you are still not convinced with benefits of this approach, read another post by clicking here to convince yourself mathematically.
c) Keep a longer horizon: Multibagger returns will take time to come, you have to keep a longer timeframe (typically 8 to 10 years) to really make most of the returns on offer. There will be periods of silence where a stock may not move up for a few quarters or even a couple of years. Here most investors fall off from multibagger ride & sell stocks.
d) Avoid falling for short-term gains: In our view, this is the most challenging part to master. Once you have a stock sitting with gains of over 100% and not moving any further for months or a few years, it’s very likely that you will be tempted to secure that profit by selling it in the fear of potential downside risk. The usual logic is that stock has run up so much and it will fall down from here. Alas, we forget the very basic that in long-term, good stocks will continue to go up as long as economy is flourishing. There is no need to exit a position with 100% gains just because it has reached there. Unless you have a financial goal associated with that investment which is very close, you should never exit from such a vantage position.
Unfortunately, this is where even well-known stock advisory service providers also falter and recommend to sell after good gains. The very reason for selling that stock is to keep their annual returns healthy for each year. For an advisor, all that matters is next calendar year’s performance & if a multibagger stock is not performing for a while, it will most likely be sold off. This is in contradiction to your situation since you can very well sit on a non-performing stock if you have conviction in investment logic. Not many stock advisors will tell you this truth.
We at AI, are committed and truly aligned to your goals. This is a reason why we never give a sell recommendation on a stock unless its investment thesis has changed and many of our past stocks are still “On Hold” position. Please visit our website for more details or chat with an online agent.
PS: For our new joiners, here is your free stock recommendation report.