WF: The dream of buying into a multi-bagger is what motivates most retail investors to get into the mid and small caps spaces - either directly or through funds. Do multi-baggers in reality happen more out of chance or design for fund managers?
Anand Radhakrishnan: Serendipity and luck do play a big role in delivering multi-baggers. But as they say, you have to first give luck a chance to do its bit. You have to do your bit first in terms of identifying opportunities: you have to take 5 bets first, if you want one to succeed.
The course to multi baggers is riddled with challenges. Many times people exit early without knowing that it will become a multi bagger over time. Many times the thesis one bought a stock on may not be panning out but some other thesis might be panning out. You should be willing to look at it from a different manner and then adapt to it and then evolve with that company or an idea.
Getting a 10 bagger or a 50 bagger is not an easy task. It's rare that you formulated an investment thesis, and the years rolled on and the thesis panned out exactly as you visualized it years ago, and you sat and watched an investment become a 10 or 50 bagger.
From my experience, a critical factor that enables one to achieve a multi-bagger is the way the stock price behaves. If you buy a stock and within 6 months the stock doubles, you do get tempted to book profits as you believe it has run far ahead of its warranted trajectory. If on the other hand, you buy a stock and it moves up say 30% in the first year, then another 40% in the next year and so on, you are happy to stay invested and participate in the journey. What then typically happens is that somewhere down the line, say in year 3 or 4, the stock sees a huge spurt as it catches broader investor fancy and gets significantly re-rated. That's when you achieve a multi-bagger. Ideally, the journey towards a 10 bagger is for a stock to be a 3 or 4 bagger until year 3 or 4, and then become a 2 bagger from then on in the next 2 years - thus delivering a 10 bagger for you over your 5-6 year holding period.
Apart from identifying a stock and an investment thesis, there are behavioral issues that decide whether a stock becomes a multi-bagger for you or not.
WF: When you meet a company management for the first time, do you come back with a sense that you could be latching onto a multi-bagger idea or is that something that you come to realise much later, when you track progress of the business after taking a position in the stock? Is it, in other words, possible to spot a multi-bagger when you see one?
Anand Radhakrishnan: Sometimes you do come back from an initial meeting with a very good feeling about the business model, the promoters and the scalability of the business. You then do your homework to test your initial hypothesis and convert the initial good feel into conviction. But more often, you come back from an initial meeting with a sense whether this will be an alpha generator or not. Your initial thoughts will be a little nebulous. You may not come back with a strong feeling that this is going to be a big winner. You do your homework, develop conviction and buy. It is when you see the initial hypothesis beginning to pan out very well, that you sense a larger opportunity in the stock than what you originally envisaged. The key to achieving a multi-bagger is to keep reviewing your investment thesis and updating it as the business evolves.
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