This New Year, Don't Go After Multibaggers. Let them Come to You

Let me begin my first piece of 2022 by wishing you a Happy and a Prosperous New Year.

May this year bring loads of health, wealth, and happiness to all of you.

Today's edition takes its inspiration from the last article I read on investing in 2021. You may not have heard of Nicola Guida but I loved this candid piece he wrote for gurufocus.com.

Nicola was one of those rare investors who invested in tech giant Apple about 8 years ago and is still holding on to his shares. He was well ahead of even Buffett on this one as the Oracle of Omaha bought his first Apple stock only in 2016.

So, what did Nicola see in Apple that even Buffett didn't back then? How did he end up on the right side of the one of the biggest wealth creating tech stocks of the last decade?

Well, you'd be surprised to know that Nicola calls his Apple investment a mistake!

Yes, you read that right.

When Nicola bought his Apple shares, he had no idea of the company's moat nor its competitive strategies. But he was part of the same industry and he loved the company's products. So he went ahead and made the purchase.

Second, the term DCF was pretty much alien to him. In his own words, he could not run a DCF model, let alone break down a business in its parts, analyse them, and make future assumptions.

In fact, he even found the PE multiple of 12x that Apple commanded back then to be too high!

Lastly, he pretty much overstayed his welcome in the stock. He abandoned his usual approach of short holding periods because the management was buying back stock. He just had a hunch the management was allocating capital well by buying back shares. Hence, decided to stay on.

Now, what makes this interesting is the apparent lack of Nicola's conviction in the entire stock buying process. He seemed pretty much clueless about the company's moat, its intrinsic value, and how long should he hold on to the stock.

But if you look at the entire thing carefully, you will realise there was indeed a lot of method to this madness.

He was getting into a stock that had made all the right moves until then. He was giving himself a sufficient margin of safety in valuations. He also kept updating his view on the stock periodically.

And this is how an anatomy of a 10-bagger should be. This is what I call not hunting for a multibagger but letting the multibagger come to you.

I am sure Nicola would have made a mess of things if he would have obsessed too much about the business or tried to find the DCF of the company to the last decimal point or kept wondering for too long whether this is a 'buy and hold forever' kind of a stock.

All he did was figure out if the stock ticked all the big boxes and then went ahead and took the plunge.

And what exactly were these boxes? It's a framework popularised by the legendary investor Terry Smith and is all of three points long.

• Buy shares in good companies
• Don't overpay
• Do nothing

Let's see how this framework would have performed in the Indian stock market over the last 10 years.

I went back in time and put together a 20-stock portfolio in December 2011 i.e. exactly a decade ago.

These are the parameters I chose based on Terry Smith and Nicola's framework...

• Buy shares in good companies - Debt free companies
• Don't overpay - PE ratio of between 5x and 10x so that there is huge margin of safety
• Do nothing - Hold the portfolio for 10 years

Extremely simple, isn't it?

Well, guess what? Like in most other fields, simple works in investing as well. Here's how the portfolio would have looked like and the returns it would have given over the next 10 years.

The Art of Letting Multibaggers Come to You!

Company	Rs 100 invested is now...
Nocil Ltd.	1,544.2
Kirloskar Ferrous Industries Ltd.	1,029.6
Bajaj Holdings & Investment Ltd.	801.5
V.S.T. Tillers Tractors Ltd.	666.0
Ashiana Housing Ltd.	634.4
Lakshmi Machine Works Ltd.	580.8
Wim Plast Ltd.	550.5
Tide Water Oil Company (India) Ltd.	515.8
India Nippon Electricals Ltd.	497.7
Honda India Power Products Ltd.	467.2
Voltamp Transformers Ltd.	434.4
Lakshmi Electrical Control Systems Ltd.	319.1
Gandhi Special Tubes Ltd.	294.9
Hindustan Zinc Ltd.	266.1
Ador Fontech Ltd.	173.6
Maharashtra Seamless Ltd.	160.2
MOIL Ltd.	148.6
John Cockrill India Ltd.	139.2
Oasis Securities Ltd.	133.6
NMDC Ltd.	82.9
Total returns	4.7x

Data Source: ACE Equity

If a 5-bagger or more, in 10 years, counts as a decent achievement, then this portfolio had as many as 9 multibaggers (India Nippon Electricals also counted as one).

I'm sure at the start of this 10-year period, very few people would have imagined stocks like Nocil or Kirloskar Ferrous or even Bajaj Holdings to turn into multibaggers.

But this is the beauty of this approach.

It does not involve doing an in-depth analysis of the company's prospects. All you need to do is put together a portfolio of 20 stocks such that the company is at least of average quality and ensuring a big, fat margin of safety.

And then, as time goes by, you track a company's progress and try to figure out if the earnings are heading in the right direction for it to become a multibagger.

There are essentially two approaches to investing. The quantitative kind and the qualitative kind.

In the first, you assume the stock to have a fixed intrinsic value based on its past performance. You only buy the stock if it's available at a big, fat discount to this value.

In the second, the intrinsic value of the company keeps growing with each passing year as the company grows its earnings and has a sound expansion plan in place.

Warren Buffett calls the quantitative approach an approach where you make the more certain money and qualitative approach as the one where you make the big money.

I guess what Nicola did was that when he bought Apple, he bought it using the quantitative method. He did not pay a lot of premium for the company's future prospects. He valued it based on its current earnings and ensured that his downside was minimum.

It was only later, when the years unfolded, he saw it as a qualitative investment and stayed put.

I think where most investors err is that they look at their stock as a qualitative investment right from day one and are even willing to pay a premium for their expectations of future growth.

But when the growth does not materialise, they suffer a double whammy. Not only does the growth not come but the premium they paid also evaporates, exposing them to a huge downside.

This is why I like Nicola's and a lot of other value investors, including Buffett's approach of not obsessing too much about finding the next multibagger but doing the basics right.

Of course, if you want to make big money, you need to get your qualitative call right. But let the stock tick all the quantitative boxes first and let it spend at least a year in the portfolio before you start analysing it qualitatively. This way, your downside is minimised and upside maximised.

So, this new year, don't go looking for multibaggers. Let the multibaggers come to you.

Happy Investing!

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter