The idea of a multibagger stock is like that of a tree, such as bamboo. While it may not grow to be humongous instantly, it will showcase results over time. And once it does, there is no stopping it.
Headlines like “if you invested ₹ 10,000 in Titan in 2002, it would have become ₹ 1.45 crore in 2022” are abundant, especially on social media sites. While seasoned campaigners remain unperturbed by such tantalising numbers, these can lead to FOMO development for beginners. As a result, they often end up investing money, hoping that they can do better and generate the same returns in a short span by buying any random smallcap or midcap stock.
While there have been several examples of fundamentally strong companies that have been able to generate massive returns in a short time, for all those who are into stock trading, they know the percentage of such companies is lower than 1%.
This article lists five critical things you should know while investing in multibagger stocks.
- Focusing on index stocks only
If a stock is a part of Nifty 50 or Sensex, it is likely that it has already seen an abnormal growth period and has now stabilised. Getting high returns from them under normal circumstances is unlikely. So you should only invest in them to bring about stability in your portfolio. But if you want disruptive returns, go for midcap or smallcap.
- Recency bias
A stock like Tyroon Tea Limited had barely moved in BSE until mid-2021. If you have invested in a company and believe it can be a potential multibagger, it takes quite an effort to hold on to them. Most of us are reluctant of the potential downside for midcap or smallcap stocks, and that propels us to book profits whenever we see a sizable green in our portfolio stocks. Multibaggers take time to bloom, but they can give significantly higher returns once they do.
- Waiting for the right price to enter
Manali Petrochemicals share price was trading below ₹ 50 up until 2021 and from then it varied to ₹ 90 in February 2022. Once it crossed ₹ 50 in February 2021, it has never returned below that level. If you are sure of a share being a potential multibagger, it wouldn’t be in your best interests to wait for the right price to enter. While you can eventually see it reaching that price, what if it doesn’t and goes the opposite way? In such cases, cost averaging is the best way forward.
- Only investing in low P/E stocks
Multibagger stock trading is not about finding low P/E or high P/E stocks. Instead, it focuses on finding shares on the verge of breaking out and may see significant growth in revenues and profits in the upcoming years. And that is the reason why you invest in them, not for their P/E value. It would be great if you found a low P/E ratio multibagger, though.
- Being loss-averse
Godawari Power and Ispat Limit reached its ATH of ₹ 924 in the middle of 2021 but is now trading at around 300 levels. If you are someone who entered during its highs, you are sitting at a significant 67% loss of your capital today. It is vital to remember that not all stocks turn multibaggers after making a position. Therefore, it is essential for you to acknowledge that you took the wrong call and exit a trade at the right time to minimise capital loss.
Finding multibaggers is tricky. Also, if you focus merely on them, you are more likely not to do well in stock trading. So it is vital to have a mix of instruments that would enable you to hedge risks and give decent returns in the long term.