26th July 2017
Everyone these days wants only multi-baggers in their portfolio. Any time you speak to anyone about stocks, all they want to know is which is the next multi-bagger? The high coverage given to many such stocks in the price is probably the main reason for this fascination. Articles are rife on the media and the Net for ways and means to spot such multi-baggers. I read one such in the last week and was intrigued by the observation. Essentially, the spokesperson of a large brokerage house made the following points for spotting the big one. The list is pretty much what most people from Warren Buffet down state.
• Look for business that operates in a niche segment.
• The company should have a solid management to help drive growth.
• Acquire such businesses at attractive valuations,
• Hold them for a longer duration,
This is not my list. It is an actual quote of someone from the market. Seems innocuous enough, right? And very doable too! But are they, really? Let’s examine each of these for do-ability by the common investor. What is a niche business? Do businesses carry that tag by themselves? Does any Association give out certificates saying this is a niche business? How is one to know? A common investor wouldn’t be able to recognize a niche business even if it was staring at him in the face! So, he has to wait to be told or informed about such niche businesses. Guess when he is going to be told? No cigars for answers to that question!!
Next, ‘solid management’, is there some criterion? Ambani Sr was almost considered a bandit back in the 70s and 80s. Adani today is still a crony. Mittal was just another telecom trader when Bharti started. Today there are about 500 mid and small cap that have all run up sharply. Who knows anything about these managements? Are they solid because the stock price is up? How do you decide what is ‘solid’? I for one have no clue how to decide this.
Then after we have found this ‘niche ‘business which has a ‘solid management’ we are supposed to acquire it at “attractive” valuations!. What is that? 10PE or 5 or 20 or..? Industry averages may not help much as such averages are also not readily available. Peer valuation, perhaps? But do you know who is the right peer to match it to? What if there are no peers? But then what about ‘niche’ segment- isn’t that supposed to get higher valuation? If so, how much more? When should this valuation be given? Now or later? And finally, if there is really a ‘niche segment stock with a solid management’ why should it be waiting for you to discover it? In all probability, it would have run already right, as the smarter chaps of the market would have bought it by now?
Finally, assuming that you were still able to do the three near-impossible things listed above and did manage to get hold of something, you are supposed to hold for ‘longer duration’. How long is that? 3 years, maybe 5, or is that 10? No one seems to be saying anything definitive there. So how am I supposed to know how long to hold? Is there some default holding period, like 5 years or something? I look back at a lot of “good” stocks from 5 years ago and they have not done anything much! Oh, perhaps they were not ‘niche’ just good?. Perhaps their managements were not solid enough? The funny thing about long term is that it is never ever defined. Hindsight is the perfect definition I guess about how long is long term. But that is of no help, right?
So, it emerges that the nice four-point advice that seemed so logical and almost self-evident, is actually a load of crap. If some advice cannot be acted upon then it is no advice at all! It may have been good for Mr. Buffet and a few like him but for the rest of us, the formula is no good, Coming from Buffet, it sounds profound but coming from a wet-behind-the-ears, minimally experienced researcher in the market sprouting these words as pearls of wisdom, it sounds ridiculous to say the least. Unfortunately there are too many of the latter who think it is fashionable to quote Buffet. If they can also tell us how to go about doing it, that would be nice! I surely don’t want to start in my teens and wait till I am over 60 to make my big bucks (which is what really happened to Buffet). Does that mean that multi baggers are not for me? What if I want my returns in a more realistic time frame? Is there a different formula for that? Do we have, perhaps, to be satisfied with a mini-bagger only then? I wonder who has the answers, if at all?