Of tenbaggers and 100 baggers

A tenbagger is an investment that grows tenfold. A 100-bagger is – you guessed it. I recently read a book with the title 100 Baggers: Stocks That Return 100-to-1 and How To Find Them. I save such books for long flights. 🙂

Searching for tenbaggers or 100-baggers isn’t a substitute for a sound investment plan, but the book highlights the importance of being patient with investments. It is extremely hard to predict which stocks will do the best in the long run. Taking quick profits is a sure way for an investor to ensure that none of his/her positions will ever grow very big. My words lack the eloquence with which Peter Lynch said it in his book One Up On Wall Street:

“The point is, there’s no arbitrary limit to how high a stock can go, and if the story is still good, the earnings continue to improve, and the fundamentals haven’t changed, “can’t go much higher” is a terrible reason to snub a stock. Shame on all those experts who advise clients to sell automatically after they double their money. You’ll never get a ten-bagger doing that.

Frankly, I’ve never been able to predict which stocks will go up tenfold, or which will go up fivefold. I try to stick with them as long as the story’s intact, hoping to be pleasantly surprised. The success of a company isn’t the surprise, but what the shares bring often is.”

Sage advice from an all-time investment great. According to Wikipedia, Lynch averaged a 29.2% annual return between 1977 and 1990, more than doubling the S&P 500 market index.

The author of 100 Baggers suggests an alternative he calls the “coffee can” method. The name is a throwback to a time when stocks were paper certificates. The idea is to stuff certificates into a coffee can and store it in a place where it will stay forgotten for years – quite the opposite of the “online brokerage” method where we can watch the fluctuations of our wealth all day long.

The outcome of the coffee can method is pleasantly often the following. Most stocks do unremarkably, but a few do reasonably well, and one does extraordinarily well making the returns of all others look paltry by comparison. The book has some entertaining anecdotes revolving around this theme.

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