How To Find Multi-Baggers: 7 Traits I Look Out For
Multi-baggers don't only come in crypto, they come in stocks too.
Introduction
With cryptocurrencies creating many overnight millionaires, this has naturally caught the attention of many investors (read: gamblers). So much so that we lose sight of the most proven asset class with the longest history of compounding wealth: Stocks.
Instead of looking for the next 100X return in crypto, investing in stocks is a much safer way of compounding. Granted, it takes a longer time for stocks to double, triple, quadruple and so on. But you can sleep well in the knowledge that you’re investing in a real underlying business, rather than a coin created out of thin air.
Stocks Reward Patience
Besides crypto, stocks can compound your wealth too, but it takes a longer time. The reason many people lose in the stock market is due to impatience. Just like it takes years to grow a tree, the same can be said for growing your capital through investing in stocks. Companies take time to grow. As companies grow, its stock price will naturally follow.
7 Traits That Multi-Baggers Have In Common
I’ve learned lots from getting my first multi-bagger in the stock market (more to come I’m sure).
Here are 7 most important traits that multi-baggers have in common:
1. Founder-Led
Founders tend to have the following qualities:
- Detail oriented
- Innovative
- Mission driven
- Long term thinking
- Have skin in the game
Look for founders.
Examples include Amazon’s Jeff Bezos, Meta’s Mark Zuckerberg, Tesla’s Elon Musk, Google’s Larry Page, and Coinbase’s Brian Armstrong.
2. Consumer-Facing
When you’re only serving businesses, your customer base is limited to the number of businesses out there. Even then, not all businesses might need what you provide.
When you serve people, the potential is endless (unless the world ends). Not everyone needs your product, but there are far more people than businesses in the world.
Find companies that attract billions of consumers. This is how brands are built in the long term. This removes customer concentration risk.
3. High Sales Growth
Find companies that exhibit high sales growth for decades. If a company can grow its sales and revenue by 20% year after year like clockwork, chances are you’ve found a gem.
An example includes Berkshire Hathaway. Since 1965, the company has been compounding at a CAGR of 20%.
4. Raving Fans
The best advertising is no advertising. Find companies that have products that are so good that they do not need to advertise. Their consumers do the marketing for them by talking about their products.
Think of all the Tesla fans who constantly talk about the company on social media. And the Apple fanboys (and girls) who change their iPhones every time a new model comes out. These companies have fans that will promote the company because they like their product so much. Companies that have a cult-like following generate very high ROI on marketing spend.
As the saying goes:
"The secret to marketing success is no secret at all: Word of mouth is all that matters." — Seth Godin
5. Tip of the Tongue
Find companies that are at the tip of the tongue. These companies are the first names you think of when asked to name a company in a certain industry.
Name an electric car company. Chances are you’ll say Tesla ($TSLA).
Name a search engine. Chances are you’ll say Google ($GOOGL).
Name a streaming service. Chances are you’ll say Netflix ($NFLX).
6. Pricing Power
Find companies that can raise their prices without losing customers.
If Apple ($AAPL) raised the prices of their iPhones, would people stop buying iPhones?
If Netflix ($NFLX) raised their subscription prices (which they did recently), would people unsubscribe?
These companies can raise their prices and yet people still buy from them.
7. Huge Total Addressable Market (TAM)
Meta ($MVRS or $FB) wants to be the leader in the metaverse. According to Statista, the market size of the metaverse is expected to increase almost 10-fold over the next 3 years. This represents a huge opportunity for companies involved in the metaverse, which Meta is a big part of.
Tesla ($TSLA) is working towards sustainability with electric cars. According to Statista, the electric vehicle market is expected to increase about 4-fold over the next 5 years. Being a market leader in the EV industry, Tesla look to be the main beneficiary.
Final Thoughts
A mistake which I made (which I hope other investors can learn from) is entering too small a position. Identifying a potential multi-bagger is not easy. It requires hours upon hours of research into understanding the company. Allocate an amount such that if the stock were to double or triple, it makes a difference to your entire portfolio.