TEN-BAGGERS: HOW COMMON ARE THEY IN INDIAN MARKETS
Legendary fund manager Peter Lynch says his best bets have typically taken “three years to ten years or more” to win big. He is the man who popularised the term ten-bagger — a stock that grows to ten times its original value. So, an investment of ~10 lakh in such a stock would multiply to ~1 crore.
As Indian stock markets hit all-time highs, Business Standard looks at how often such winners are to be found. The analysis shows that at least a dozen companies (or securities) grew to ten-bagger levels or more in every year of the last decade.
Data as of March-end was considered for the exercise. Prices could vary in between but this provides a broadly indicative sense of how commonly such securities can be found. The list contained over 8,000 names spanning over 20 years. It included formerly listed companies and even some mutual fund units; essentially any financial security one could have bought on the stock exchange and watched grow to ten times or more of the buying price. A holding period of three years was considered, in line with Lynch’s assessment.
The highest number of tenbaggers to be realised in a given year pre-dates the global financial crisis. The financial year ending in 2005, 2006 and 2007 (FY05-07) saw hundreds of securities turning ten-baggers. There have been ten-baggers every year since, but not at the same scale. Interestingly, the creation of ten-baggers is closely linked to how well the benchmark S&P BSE Sensex has done (see chart 1). Ten-baggers are realised as markets boom, though they are often bought during periods of decline. The highest number of ten-baggers was in FY06, but investors would have had to buy them in FY03 when the S&P Sensex had fallen 39 per cent.
While the absolute number of such winners seems high, the odds of finding one at random are slim. Less than 2 per cent of securities in a given year have turned ten-baggers on average over the last decade with a holding period of three years. The odds improve the longer you can hold on. There is a 14.6 per cent chance of getting a tenbagger from a random pick if you are willing to hold for ten years (see chart 2).
Anaverageinvestor’s chancesoffindingaten-bagger maybeaffectedbytheir behaviour.theholdingperiod forindianinvestorsiscurrently atitslowestinoveradecadeat1.3 years(seechart3).atitshighest point,theholdingperiodwas2.2 years.thiscoincideswitha volatileperiodofdeclineforthe marketsduringthe2013taper tantrum.thiswaswhenthe Americancentralbanksuggestedthatitwouldstartcutting downonthelargeamountsof moneyithadbeenpumpinginto thefinancialsystemafterthe globalfinancialcrisis.stock marketswhoseascenthadbeen supportedbythefloodofcash correctedsharply.
As speculation over another tapering gathers ground, investors may want to reexamine not only the stocks they hold but also how long they hold them.