Last Updated on May 25, 2022 by Neera Bhardwaj
You must have come across lucrative headlines like ” If you had invested 5,000 in the shares of XYZ ltd 5 years ago, your investment would have multiplied to 10 lakh!”
Such new items may test investors, also giving them a FOMO bias, especially for beginners who are just starting their investing journey. It’s true that companies driven by strong fundamentals and spirited management have turned multibagger in an unbelievably short period, but that’s the case with one out of several thousand companies. We are talking about a probability of less than 1% when we talk about spotting such gems of the stock market out of the pile of companies that have the potential to turn multibagger.
That said, multibagger stocks don’t take a parachute landing into the market. Such stocks stay away from the radar and market limelight for the best part of their growth stages, and it is only when the exponential returns generated by the company start to attract the attention of mainstream markets, such stocks catch feature in headlines.
But investors, often with hope and sometimes because of greed, carelessly allocate money to stocks they hope would turn multibaggers. Take note of 5 things investors miss out on when identifying multibagger stocks.
Table of Contents
Loss aversion
Not all stock turn multibaggers. With the hope of gaining profits, you may end up entering wrong trades and stocks. Most investors believe in holding loss-making trades with the ideology that a loss is not made until it is not realized. Investors don’t square off their loss-making trades with the hope that someday, the price will bounce back to their purchasing cost, and they’ll exit on cost or even collect the premium.
This is a wrong approach to investing. It is a giant capital killer. For once, you can invest without deciding your target on the upside, but at all times, you should limit your losses on the downsides.
Fighting the market
Most investors believe that they could fight off the markets in case they invest in subpar stocks. But ‘I’ll make the market compensate my losses’ will take you nowhere. Being revengeful with the market may not be a wise strategy.
Suppose one of your multibagger picks doesn’t work out well, and you end up making a loss; you cannot reenter the market to recover your losses from investing in that same stock again. Instead, recoup your remaining corpus and look for another investment opportunity that promises value for money.
Waiting for a price
Waiting for the right price may not benefit you if dealing with multibagger stocks. For example, SBI shares traded at Rs. 175 last year when the market was in recovery mode after Covid-19 mayhem. Do you think now, when SBI is trading above 450, it’s rational to wait for it to slide down to the levels of 175 so that you can invest in the stock?
Obviously, there’s a very slim possibility for that to happen. A huge market crash could bring that level in SBI again, and while you’ll wait for that to happen, it’s possible that the stock surges to 500, 600, or even higher.
This bias in investors to wait for a familiar price is driven by their emotions, and that’s why it is advised to trade strictly based on current market conditions and not on what happened in the past.
Attempting to time the markets
No investor has accurately timed the market. Even institutional investors who are capable enough to manipulate volumes on their own fail to time the markets. Hence, waiting for a quality stock to slide down to a magical number is not wise.
Similarly, you can never predict whether a stock will continue to rally for another couple of months or if it will start falling down tomorrow. The best thing you can do is to move ahead with a strategy, a target price, and a stop loss to counterbalance. Once your target is realized, exit the trade without letting your greed take over.
Recency bias
What is the purpose of your investments? Enjoying short-term gains or reaping exponential returns in the long run? Since we are talking about multibagger stocks, our aim should be more inclined towards the latter.
When we aim for the long term, we should not base our decisions on the short-term or the recent performance of the stock. A stock that hasn’t performed that well in the previous quarter but is coming off the back of some stellar numbers in the earlier quarters may still be a good stock to invest in for the long term.
Instead of withdrawing your trust and investments in the stock immediately, try to look for the possible causes of such muted performance. Otherwise, short-term fluctuations shouldn’t be the governing factor for pulling out your investments.
Conclusion
Multibagger stocks are an exception to the famous saying- ‘There are no shortcuts to success.‘ These hidden gems of the stock market can actually make you rich, and you don’t even need to stake heavily. But the trick resides in finding multibagger stocks. Multibagger stocks are referred to as ‘Hidden Gems’ because spotting them is hard, but one shall reap loads of profit once you land on one. Taking care of the common mistakes discussed above will ease your search for potential multibagger stocks.
