I have revisited my first ever article for the Fool. A glitch on Investors Chronicle's website resulted in their re-publishing an article from three years ago but with Friday's date. "Tomorrow's 10-baggers" chooses eight shares that could ten-bag. How did they do?Looking for Ten-Baggers is a Losing Strategy: 7 reasons why these 8 10-bagger picks have lost 42% in 3 yrs.http://cheapskateinvestor.blogspot.co.uk/2013/07/looking-for...@MrContrarian
The article is missing a very important reason: underdiversification / lack of understanding of probability.Suppose for the sake of argument that you have a strategy for picking 10-baggers that succeeds over the following three years 20% of the time. Great, you think: the statistical expectation of an investment in such a share is at least twice my original investment from the successes, plus whatever I can recover from the failures. So you pick the eight such shares that you can find, sit back for three years and look at the results - and none of the hoped-for 10-baggers have materialised, so you conclude that there is something wrong with your strategy. Is that conclusion correct?Not necessarily... Each of the eight shares had an 80% = 0.8 chance of being a failure, so if they behaved independently of each other, you had a 0.8^8 = ~0.168 = ~16.8% chance of them all being failures. I.e. it could just be that your strategy really is a money-spinner but you got moderately unlucky - about as unlucky as throwing precisely the wrong number on a single die during a game. (And since in fact the various shares' fortunes are likely to be positively correlated with each other, via e.g. general economic conditions, the chance of all eight being failures is probably higher than that, reducing the amount of bad luck involved.)None of that says there is nothing wrong with the strategy, but neither does it say that there is something wrong: you simply don't know yet whether the strategy's statistical behaviour in practice matches what you think it is. What it does say is that there is a practical problem with your implementation of the strategy, namely that you haven't used it to select enough shares to reduce the likelihood of serious bad luck to something reasonably insignificant. Or in far fewer words, you didn't diversify enough for the strategy.Of course, it may be that the strategy is so fussy about the shares it picks that you couldn't pick enough shares - there simply weren't enough shares meeting its requirements on the market. If that's the case, it simply isn't suitable on its own as anything other than a "death or glory" strategy; a more likely use is for a small fraction of your overall portfolio to add some spice to a less risky strategy - in the full knowledge that you might be left not knowing whether there is something wrong with the strategy or not for a very long time, but willing to take the gamble.Gengulphus
The main premise of the article is sound and the 7 reasons even better. I can relate to it based on my 3 yr performance ;)BUT, the sample set chosen to illustrate the point is heavily skewed towards the oil/energy resources sector. This sector has been a real laggard for the last 3 years. USO (Oil Fund ETF) has been broadly flat for 3 years now. A more diversified 'potential 10-bagger' portfolio could draw a very different conclusion. Using Charlie Munger's "Invert, Always Invert" dogma, maybe the problem is we're setting our sights too low. 10-baggers is a Losing Strategy and only for wimps. Who's volunteering to share a potential 50-bagger portfolio ;)
BUT, the sample set chosen to illustrate the point is heavily skewed towards the oil/energy resources sector. This sector has been a real laggard for the last 3 years.Does anyone have a good explanation for why that is? 3 years ago oil prices were at about $75. Now they are $107, which is about the middle of their range for the last two years - and the last two years has been a sustained period of record high oil prices, surpassed only very briefly for 2-3 months in 2008.Companies that are producing oil have been churning out cash - and the majors yield 5% or more. That makes them in the top 10% of FTSE100 yielders http://www.topyields.nl/Top-dividend-yields-of-FTSE100.phpWhy?
I think investing for 10 baggers is an excellent idea as long as you look for the right stocks and don't look for 10 baggers - you need to get your 10 baggers by accident imo.I'd say the real 10 baggers are the stocks you buy that you weren't looking to 10 bag but become 10 baggers. This is usually because you look for a stock that is screamingly undervalued in a market where shares are being shunned imo.Hornby was a real boring stock when I bought it at circa 140p in 2000. Everyone said 'what, the model trains?' like I was crazy. I sold out a few years later at £10 having also bagged a packet in sizeable divis too. The thing was it was a boring share, people were totally uninterested. The press never even covered it until it hit £5. At £7 a share they were enthusiastic and at £10 they were having multiple orgasms about the co. That's the time to sell imo. JDG was a classic. A market where everyone was scared, but directors buying and a fwd PE of about 3 when I bought at £1 a share. Did I think It was a bargain when I bought it? Yes. Did I think it would 10 bag when I bought it? No.That's the difference imo. When you buy stock that you think is a potential 10 bagger most have done it on hype, press speculation and bulletin board sizzle. Most will be AIM miners or dreamer stocks, foreign based and full of directors with dubious intent imo. The risk outweighs the illusory potential reward.TCG - did that look a 10 bagger in October? No, but as soon as the new CEO came out and said she had made even greater savings than forecast and then bough 500K shares I think that said they were going up from there out. They've nearly 10 bagged in about 8 months but nobody seemed interested here when I put them in the shares competition. Just seemed so ironic that once they were well over £1 Motley Fool ran an article asking were these a buy now? You need to be contrarian but you need not be reckless. Which sort of sums 10 baggers up for me. If you buy genuine undervaluation when others are uninterested then often the 10 baggers come to you by accident. If you look for something that looks like a 10 bagger then you're probably missing something fundamental imo.Buying several AIM miners and the like that look like 10 baggers looks like the route to disaster imo. You're just increasing your chances of buying some real duff dogs imo. Yep, you might get lucky with one that out performs all the rest that go bust but why have one 10 bagger and 7 others that go bust? It might sound like you're up on the deal but far better to pick 7-8 solidly undervalued stocks and find they nearly all go up and one becomes a 10 bagger by accident imoCR
Yes a very amusing report, particularly as I held 3 of those stocks at one time. Clearly I am a sucker for good stories. I don't think the table is quite accurate though. Asterand delisted and became Bioseek and is now being liquidated. Best guess at about 2p per share I think for ordinary shareholders. The key to investing in these potential wonder stocks from my experience is to buy a very few shares and see how the story works out. By such an approach I think I am making reasonable profits from the three overall, as the other two holdings were Faroe and Monitise, and I still hold the latter. But I wish they would stop issuing more equity and start making some profits (and real cash profits I mean).
Without my ten baggers or whatever they were, Sportin Bet (did well twice) and Stakis into Ladbrokes, my over the years investing record would be well below average, as it is I like to think that so far it is around average. One of my first stocks being British Steel for the 7% yield, complete disaster, the price was going down and it stayed going down, all the way to the bottom I think.My preference after 20 years very part time investing is momentum buying, if I select a stock and it increases in value by 10 %, buy more and continue, get out when my nerve fails. Seems to me that someone knows something more than I do (as they always will) so follow the stock up. Conversely if it drops, get out as quick as you can.Something strange going on with ATUK today, Paulypilot wrote about it last week. Having mentioned it and having a holding, which is larger than it was yesterday, I fully expect to see it drop back down rather sharpish.Muddled conclusion, I support the idea of traying to find multi baggers, without them I may as well get some trackers.
Which sort of sums 10 baggers up for me. If you buy genuine undervaluation when others are uninterested then often the 10 baggers come to you by accident. If you look for something that looks like a 10 bagger then you're probably missing something fundamental imo.Great post CR, For anyone who's not had very successful investments, and I certainly count myself in that number, and who might perhaps be baulking at even discussing the potential for any share to get into 10-bagger territory, I always think it's worth looking at some numbers so we can see that, especially if looking at growth-type stocks over a long enough time-frame, then 10-bagging shares might not be as rare as we might think. Here's a spreadsheet snapshot showing some figures :-http://i.imgur.com/Czgegk0.jpgObviously to get to 2-bagger status we're looking to double the initial share price, but from that new 2-bagger position, only a 50% increase in the share price is then needed to get from 2-bagger to 3-bagger territory. After that it gets a bit less onerous. Only a 33.33% increase in the share price is required to get from 3-bagger to a 4-bagger position, and at the top end of the scale we're looking at just a 12.5% increase to go from an 8-bagger to a 9-bagger, and then just a hop-skip-and-a-jump with another 11.11% increase in the share price to get from a 9-bagger position into that fabled 10-bagger state. This isn't in any way trying to describe any 10-bagger process as being simple to achieve, as it's clearly very difficult and something I've never personally got to myself, but I always find it's worth putting some numbers up when discussing these types of things, so I hope someone finds this post useful. Cheers, Itsallaguess
BUT, the sample set chosen to illustrate the point is heavily skewed towards the oil/energy resources sector. This sector has been a real laggard for the last 3 years.Does anyone have a good explanation for why that is? That's a "no" then......Fashion? I thought that high yielders were supposed to be in fashionShale gas? Gimme a break. Even US oil prices are up 19% in the last three months as that theory starts to bite the dust......http://www.cmegroup.com/popup/mdq2.html?code=CLGLOBEXQ3&...Next it'll be wind - or some other variety of hot air....