Friday, February 03, 2006

My Investing Journey- My Experience With Multi-Baggers 1 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
Those who have been investing for a few years would have seen their fair share of what Peter Lynch calls "multi-baggers". Stock price fluctuations in the short term tend to be random and subject to market moods but in the long run the intrinsic value of a good business ultimately creates the sustained price momentum that can reap enormous profits for the lucky/patient investor who sits and holds.

I'm sure most investors, if they have been in the market long enough, would have picked up their fair share of stocks which have eventually turned out to be such multi-baggers. Unfortunately, it is also common that many an investor has succumbed to the common adage of "you can't go broke taking a profit", sold out at the first signs of price resistance, and then watched the stock soar past all barriers to a stock Nirvana that punished many times over his initial inability to sit tight. In the same way that a war veteran shows his battle scars, I am proud to say that I have been through this experience several times.

Unisteel was listed in early 2000 at the price of $0.50, a valuation which amounted to about 18X trailing PE (an admittedly high PE, which just gives us a perspective on how bullishness in the tech sector has mellowed since the heady dot-com days). Unisteel was a major precision fastener supplier for the global hard disk drive suppliers, and its profit margins were breathtaking for such a seemingly boring business: >20% consistently for the previous few years. My stock picking strategy in late 2000 had graduated to a perfunctory check on the profit and revenue figures of a company: a consistently rising trend was the requirement; and then I sought other people's opinions on online forums as a corroboration. Those oldbirds on will remember Mossie: he was a highly respected forummer and great insights; Unisteel was one of the stocks he recommended. I was encouraged by his views and bought into the stock progressively from Sep 2000 (yes, dollar cost averaging - I had progressed!), eventually accummulating 15 lots at an average price of about 42 cents by mid-2001. The company had continued its strong performance post-IPO, growing both revenue and profit by ~50% each for FY2000 (which reduced PE to 12X) but the price just did not move, trading within a narrow range of 40-50 cents. On retrospect, it was just a case of the price waiting for profit growth to catch up --- the entire tech sector was re-rating downwards in terms of PE --- but the scintillating growth of Unisteel should have meant something. It didn't ring a bell, I got impatient waiting and sold out my entire line in Aug 2001 at 46 cents (a 10% profit). September 11 came and went, Unisteel went close to 30 cents, but that was the last chance for a bargain. In early 2002 the company unveiled another scintillating set of results (for FY2001) which saw profit grow another 50% on increased operating margins, fund managers started to wise up to the potential of its lucrative if unexciting niche of precision fasteners and the share price showed a clean pair heels as it surged, on the back of continually strong earnings growth, to its current $2 today. Bonus issue-adjusted, I would have had a 6-bagger if I had held on till today. And that duration includes a gloomy 3-year period from 2000-2003 when stocks floundered to bargain valuations.

Or how about HTL? That was another of my inspired picks in March 2002. It was trading at 7X PE and had been growing revenue and profit consistently for the past 3 years. I bought in at 40 cents, then sold off at 49 cents within 2 months for a quick 20% gain. Not bad, unless you consider that within 2.5 years (by mid-2004) it was trading at a bonus-adjusted $1.60 or a 3-bagger on my initial investment if I had held on. Like Unisteel, the company showed ~40-50% profit growth year-on-year, and featured increasing profit margins. Like Unisteel, it became an institutional stock and underwent a PE re-rating from 6-7X to 10-12X, thus providing a double booster to share price over-and-above its earnings growth. Unfortunately I was too ready to convert my paper profit to cash in May 2002. Why? Because I was on a roll in early 2002 (more on that next time) when there was a small-cap rally, and wanted to keep the momentum going by buying and then selling a stock once it reached the 20% capital gain, then ploughing the money into other stocks. Why 20%? Just an arbitrary figure. Amd why the strategy? Frankly, now on retrospect it looks like a "stop gain" strategy (as opposed to stop loss); I was cutting the flowers off and not letting them bloom.

How does one catch a multi-bagger? That is the million-dollar question that nobody has a real answer to. Obviously the first step is to pick the correct stock. However, the more difficult thing to do, from my experience, is to sit tight on it. It is one thing to read about Warren Buffett preach about it, but it is another thing to practise what Warren Buffett preaches. Ultimately, one has to go through the experience himself to understand the full impact of the words. Then he will internalise the experience, and make the full transition to practising what he (not some other person, but he himself) preaches.




Anonymous Anonymous said...

Wonderful thoughts and humbleness galore. Very-Lynch-y.

I had thought about doing something like that for a self reminder.

Very re-freshing read.

6/05/2006 5:35 AM  

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