What is a Ten Bagger?
Ten bagger refers to an investment that generates a return of ten times the amount of the initial investment, i.e., 1,000% return on investment (ROI). The term 10 bagger was popularized by famous Wall Street investor Peter Lynch, which he borrowed baseball where additional base hits are also referred to as “baggers”.
Ten baggers are mostly used to describe stocks that grow tenfold within a given time frame. For an investor to benefit from a 10 bagger investment, they must stick to the investment for a long period, which can run to several years or decades.
Peter Lynch’s Ten Bagger Investments
Lynch’s book, first published in 1989, documented his journey as the manager of the Fidelity Magellan Fund, which he headed from 1977 to 1990. Lynch grew the fund’s investments from $18 million to over to $19 billion during his tenure. The growth translated into an annual rate of return of 29.9%.
When choosing the stocks to invest in, Lynch relied on two main criteria. First, he invested in stocks with a price-earnings ratio below the industry mean. The American investor also considered stocks with high earnings per share but below 50%. He gave Wal-Mart as an example of a ten bagger investment. He argued that investors who initially bought Wal-Mart’s stocks when the company went public would’ve earned 30 times their initial investment.
Key Attributes of a Ten Bagger
When selecting an investment with the possibility of growing into a tenbagger investment, there are several attributes that an investor should consider:
The base effect
In a closed economy, a large company tends to grow at a slower rate compared to a small company operating in the same economy. Usually, a large company cannot grow beyond the economy as a whole, and as it becomes bigger, the growth rate grows slowly up to a certain point when it becomes stagnant. When investors put their money in an already large company, there are slimmer chances of the investments growing tenfold as compared to a small company.
On the other hand, investing in small-cap stocks or early-stage companies offers a high probability of growing into a 10 bagger, as long as they continue being profitable.
An investor must consider how much the stocks of a company are worth and their chances of growth in the future. The ideal stocks for investment are those that are lowly priced or little known, but they with the potential to increase in value. However, if an investor purchases shares at a high cost, they are unlikely to get a high return on their investment because the stocks were expensive from the start.
For example, if an investor invests in the stocks of a new technology company that is priced at $10 and the company is projected to grow at 30% each year in the next five years, it means that the company’s stocks are highly likely to grow past the $100 mark into a tenbagger in the future.
Fair operating environment
The backbone of a multi-bagger is a good business operating environment. The business needs to operate in a good environment, i.e., fair tax laws, technology solutions, fair competition, etc. for it to enjoy high growth rates.
Internally, the business must possess strong underlying fundamentals that act as catalysts for tenfold growth. The fundamentals comprise high profitability, optimal debt levels, high growth potential, unique product offering, high barriers to entry, etc. All the characteristics can help propel a company into a ten-bagger within a given time frame.
Three Principles in Finding 10 Bagger Stocks
There are several principles that investors can take into account when shopping for stocks that generate massive returns on the original investment.
As an investor, it pays to start small because small cap stocks see more opportunities for growth compared to large-cap stocks. For example, Apple Inc. is one of the largest companies that dominate the stock market. Its market cap is almost $1 trillion (as of 2018). For the company to be a ten bagger, its market cap would need to hit $9 trillion.
Apple’s market cap might double or triple, but it would seem impossible to hit the $9 trillion mark in the next few decades. Examples of large companies that started as small ones and later became ten baggers include Apple, Netflix, Google, and Tesla.
Diversify your investments
Stocks that deliver ten bagger results are difficult to find, and they take a lot of effort and betting on chances. Owning multiple stocks of high growth companies helps spread the risks and increase the chances of some of the investments growing into multi-baggers. For example, if an investor conducts thorough market research and chooses 20 small but high potential stocks to invest in, there is a likelihood that there will be one or more stocks that will deliver tenbagger returns in the future.
Venture capitalists use the technique above when investing in startup companies – where they invest in multiple high potential companies that offer higher chances of bringing massive returns to offset others that end up collapsing before recouping their initial investment.
Longer holding periods provide greater gains
While it is possible for an investment to grow tenfold within a year or two, most stocks experience such returns within an average period of ten years. For small companies that are starting out, the initial years are crucial to propel the companies into the league of large companies within a decade or more.
Therefore, for investors to benefit from massive returns, they must be willing to hold on to the stocks for a long time. An investor is unlikely to get a 10 bagger if they sell the investment at 20%, 50% or 100% return. If the investment managed to double or triple, it means that it offers higher chances of growing tenfold.
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