Can you stomach multibaggers? - The 5 Minute WrapUp by Equitymaster
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Can you stomach multibaggers?

May 4, 2011

In this issue:
» It's not going to be cake walk for Asia
» Bin Laden has cost US a bomb
» A new measure to tap black money
» Loans are set to get dearer
» ...and more!


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00:00
 
Ever since Peter Lynch coined the famous term "multibagger", it became a part of every investor's vocabulary. How strongly we all wish to find a few multibagger stocks that would quickly multiply some "x" number of times!

The good news is that you often bump into multibagger stocks. Most of you who have been in the stock markets for a decade may have witnessed so many stocks going through the roofs. You may have even held them in your portfolio at some point in time. You may have made money on them, you may have lost some.

Now the bad news. Despite trading in those stocks, you may have still missed their "multibagger" ride. Ever wonder why? What is it that deters you from riding a multibagger?

One major problem lies in the way you look at a stock. Do you think of it as a quick and easy gambling machine where the price quote changes every few seconds? Investors who share this view of stock markets think and live in the short term. They become too excited if the stock they have bought starts rising too much. A combination of enthusiasm and fear often causes them to sell prematurely.

Investors who focus too much on the stock price and not the intrinsic value will certainly fail to ride multibaggers.

But there is an alternative way to look at stock markets. Imagine buying an ownership stake in the company. Do not worry even if it's a very miniscule share. Think like an owner. How's the business doing? Are the managers doing a fine job? Do you see the company growing profitably in the future? This thought process will force you to think long term. Because real business does not fluctuate every single day the way a stock market price graph does. You will be forced to look away from daily prices to the real worth of the business. And if all goes well, you'll find yourself proudly riding a multibagger.

Do you think this business-oriented, value-focussed, long term approach to investing will help you ride multibaggers? Share your comments with us or post your views on our facebook page.

01:11
 Chart of the day
 
For the first time in the last 8 years, the RBI has hiked rates on bank savings deposits. The rates have been increased by 50 basis points (0.5%) from 3.5% per annum to 4%. But given the high inflationary scenario, the real returns still continue to be negative. The move has come at a time when the central bank is contemplating deregulation of savings deposit rates. Today's chart of the day shows that the household sector comprises over 80% of the investments in savings bank accounts. Though one should keep some money invested in savings deposits for emergency funds, heavy investments in the same may erode purchasing power.

Data source: Mint

01:36
 
US' best days are behind it. This theme has perhaps been done to death now. So has been its natural corollary that the current century well and truly belongs to Asia. If all goes as per plan, by mid century, Asian economies could command an imposing 50% share in the global economy; a far cry from the 27% share they command now. Did anyone notice the caveat at the beginning of the sentence? The caveat in the form of 'if all goes as per plan'. Well, it has certainly been noticed by quite a few economists out there. And what more, they have even begun seriously doubting the same.

Clearly, all may not go as per plan. What if China implodes and starts growing at 5%-6% instead of the high single digit growth it has become so accustomed to. Furthermore, what if we get too carried away by the strong growth and turn a blind eye to challenges that later on scale up to unmanageable levels. If not any other country, this certainly is a big risk that the likes of India face. Agreed, that the continent's growth cannot come to a screeching halt. But then the danger that Asia could fall in the Latin America type middle income trap, cannot be ignored either. Thus, there is a long way to go before the bubbly is uncorked. Asia's time in the sun is certainly probable but it would be a mistake to call it preordained.

02:17
 
September 11, 2001. The WTC buildings in New York collapsed, unleashing a wave of terror across the globe. Within a week of the attacks, a spending spree was underway. A new agency called the Department of Homeland Security was established soon after the attack. Its singular mission was to stop terrorism in the country. This department has spent more than US$ 424 bn over the past decade. It will spend a further US$ 71.6 bn in 2012, according to Obama's projections. Putting this in context, this amount is more than the GDP (2009) of 132 countries, including Iraq, Croatia and Cuba.

Over the past ten years US' defense spending has doubled, rising to almost US$700 bn in 2010. This works out to around 20% of the entire federal budget. Spending should have been offset by either raising taxes or with cuts in other areas. But this was not the case, leaving the United States with a US$ 14 trillion debt problem. So, Osama may be dead, but he has cost the US a 'bomb'.

02:49
 
A new measure has been proposed to tighten the noose on black money. The finance ministry is planning to streamline third-party information supplied on high-value transactions. It will be done by merging together the current two channels –Annual Information Return (AIR) and Central Information Branch (CIB) that report such transactions. This will make it easy for third party and the Government to give and collect information at a single place. This will speed up the data flow used to check tax evasion.

In the past few months, there has been a lot of hue and cry over the disclosure of names of those having loads of black money in Swiss bank accounts. The whole exercise more or less turned out to be a damp squib. However, the Government is under huge pressure from all quarters to address the concerns. Under such scenario, we hope the whole thing is not just a facade to keep the pressure under control for a while.

03:26
 
Banks' interest rates on loans are bound to keep an upward bias. Especially after the rate hike affected by the RBI yesterday on repo as well as savings deposits. The entities can hardly afford to not pass on the rate hikes to their loan customers. But only if these were the key reasons for hiking lending rates!

The RBI is giving banks no leeway on the provisioning front as well. It has been barely a month since the RBI withdrew the 70% provision coverage norm. But yesterday, the central banks imposed higher provisions on non- performing and doubtful loans. These are certainly keeping the risk of slippages in mind, given the higher interest payouts. Some banks believe that the higher provision norms would be better than an ongoing coverage of 70% on all gross NPAs. But the same would certainly come at a higher cost to most banks. Those that fail to wield the pricing power to pass on the rate hikes and provision costs may have to brace for lower margins in the medium term.

04:00
 
US government and their policies have led them to become a subject of public criticism. Popular entrepreneur, Wayne Rogers, is the latest to take a stab at it. He has accused US of becoming a 'fascist economy' that is 'strangling' the entrepreneurs in the country. Fascism is defined as an authoritative form of government led by a dictator having complete power. Mr Rogers states that the government's policies are made without thinking of their impact on the financial and business sectors. A case in point is the faulty financial reforms that the country has adopted. The result of these flawed reforms is that the smaller banks have lost their power and the large banks have just become bigger. In fact, the big four banks now control nearly 54% of the banking assets in the US. As a result of taking away the power from the smaller banks, it is now difficult for the entrepreneurial community to get loans to further their ventures.

Though Mr Rogers' scathing accusations may seem a bit exaggerated; they nonetheless resolutely point at the massive goof-ups done by US policymakers.

04:37
 
In the meanwhile, the Indian stock markets have recovered from the day's lows but are still trading in the red. At the time of writing, India's benchmark index, the BSE Sensex was trading lower by 60 points (0.3%). Auto and IT stocks were the maximum losers while Oil&Gas and Capital goods were trading strong. All the Asian stock markets were also on the losing end except Japan.

04:55
 Today's investing mantra
"The average person needs only a few good stocks in a lifetime." - Peter Lynch

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5 Responses to "Can you stomach multibaggers?"

Usha Kashyap

May 4, 2011

Yours is a sane and solid advice. This has to happen this way and none else. Alas, because of our our focus on short term profits, we miss the opportunities galore.

Like 

Sakharwade

May 4, 2011

I am not sure if the proportion of investor transactions on a given day is sizeable ftraction of total trades.

The fluctuations reflect largely the sentiments contributed by traders rather than investors.

So, traders drive the market trends.

Like 

kuldeep

May 4, 2011

Let me know the names of some past multibaggers.

Like 

Digambar Kulkarni

May 4, 2011

When a multibagger starts rising. sell and repurchase when it rises to a predecided level say 25%.

This way you will spend for Brokerage but the profit will be in your bag regularly.

When it falls belowa predetermined level say -10%, sell it off.

This way one can earn profit with security.

Like 

thangaraju

May 4, 2011

Though multi-bagger is to stay long like owners, what about profit booking and getting certain return every year?

Like 
  
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