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The key to building wealth is to put your money in the right place. There are high chances of growing the money if you have huge winners in your portfolio. The stock market is a great place to make money, but it all depends on the stocks you invest in. A major performance driver is a knack for finding the right investments and holding on to them long-term. Finding the top 10 bagger stocks might seem difficult, but if you focus on the right places, you will have some solid investments in your portfolio.
Bagger stocks are those investments that generate huge returns on the original investment. Finding 10 baggers does not need any complex investment strategy but involves investing in companies still in the early stage of growth. Success is not guaranteed in the stock market, and you will experience volatility along the way, but if you buy and hold for the long term, there is a high potential of making money.
In this article
Finding 10 bagger stocks
Here’s what you need to watch out for when looking for the 10 bagger stocks.
Businesses that have an open future
You need to look for businesses that provide products or services their customers love. If customers do not like a product to service, they will not buy it again, affecting the company’s business. Hence, you need to identify companies with a solid product portfolio. It should have the potential to disrupt the industry and make your life easier. Do not just look at the companies thriving today.
Focus on the businesses that have the potential to win in the future. When Netflix started the streaming business, it was fairly new, and we were looking to move away from traditional cable TV. There was little competition, giving us content that could not be matched by cable TV. The company had a huge opportunity to monetize the content, and it did. It made the most of the growth and enjoyed cable cutting, and bought a transition towards streaming services. It was a multi-bagger at that time and has generated massive gains for investors.
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Identify trends
The biggest winners in the stock market are often a result of major shifts or disruptions in the industry dynamics, consumer preferences, or business practices. New technologies often lead this shift. It helps to identify new trends or innovations that can impact the future. Remember, it should not be just hype, and if you can identify the trend, you will notice that a visionary leads it in the industry.
Top management and leadership have a huge impact on the success of a business, whether it is cloud computing, metaverse, or e-commerce. Imagine investing in Amazon in 1997 when e-commerce was a new trend. It turned out to be 100 baggers, which means your investment could have grown to more than 100 times in value.
Look at management and leadership
Business management and leadership are two crucial factors that determine the success or failure of a business. It is not just the tough times a business faces that show how well or poorly the business is managed. Successful companies have faced massive downturns, but the right leadership and management could change the fate of the business. Tesla is a successful company led by Elon Musk, and he has taken it to massive heights.
Even when the Nasdaq was down, Tesla stock traded at over $1,000. Further, Advanced Micro Devices is also known for the impressive leadership of Lisa Su, who has taken the business to new heights with her knowledge and skills. Your 10-bagger is behind these leaders. You could invest in an early-stage company that isn’t successful, but you need to pick the right management and leadership team.
They will develop solutions to handle competition or introduce new technologies that can transform the business. The leadership will take the business from a small-cap to a mid-cap or large-cap and be certain that its position is not under threat for the foreseeable future.
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Start small and early
The trick to top stock picks is identifying small companies and investing in them early. It does not make sense to consider Apple as your next 10-bagger because it is already inching closer to $3 trillion in valuation, and the company has become too large. The stock purchase price is high, and you might not get a chance to make it to your next five baggers or 10 baggers. There was a time when crypto was fairly new, and Bitcoin was the only asset investors were running after. See how much it has grown in the past year despite the ups and downs. You might not consider it worth your investment since it has already hit the highs.
When a company becomes too large, getting the stock at a low rate is hard, and it naturally becomes difficult to grow. To enjoy the 10-bagger status, it is important to look for smaller companies or stocks that can hit the status of a multi-bagger. You might not feel confident that the stock will become a 10-bagger, but it will be if the company has growth potential. When you start, the stock price could be on the smaller side, and the company’s market cap could be under $10 billion or even $5 billion, but it can grow tremendously. Just look at Amazon and see how it has grown over time.
Diversification is the key
Irrespective of your personal finance goals or risk appetite, it is important to diversify the portfolio. Never put all the eggs in one basket to make the most of the gains. When you diversify, you can invest in multiple businesses that have the potential to deliver high returns. Very few businesses can deliver 10-bagger returns, and when you diversify, you increase the chances of finding them.
You need to identify 5-7 stocks that have the potential to increase 10 times in value. If all the stocks increase, it will work wonders for your portfolio, but even if a couple of stocks become multi-baggers, you will enjoy high returns. It can be an amazing feat, but it will only come from research and investment.
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Buy and hold
If you want big gains, you need to remember that they do not happen overnight or in a year. You will need a few years for the stock to become a 10-bagger. Be prepared to buy and hold for the long term. Some of the highest returning stocks generate more than 20 times their original investment, but it could take two decades for it to happen. Understand the power of compounding when you make investment decisions.
Nothing can happen overnight, and you should not expect it either. If you had invested in Microsoft stock in 2000 for $35, you would be sitting on massive gains today. With the dividends and stock splits, the gains could be enormous. The idea is to identify the right companies that are in early-stage, make a move and hold for the long haul.
Do not sell once your stock wins
Many investors are over-eager to sell the winners and make the most of the gains. Naturally, you want to take home the gains before the market volatility wipes them out. However, to make more money, you need to hold the stock through the good and bad times. Let the stock run but continue to keep the money on the table. There are exceptions to this. If a single stock has become a huge part of the portfolio, and you are unsure about its future, you can trim or choose to sell it. But do not mindlessly sell the top stocks only because they have returned the original investment you made.
Avoid panic selling at all costs. If you are looking for potential 10-bagger stocks, you need to stay in the game for the long term. There are times when a stock becomes an 8-bagger, and you could be tempted to sell and take the gains, but if the business is doing so well, you do not need to trim the position or sell it. Keep in mind that a 10-bagger can also hit a 50-bagger status.
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Avoid superficial valuation measures
It is important to consider the stock's past price but not anchor over the superficial valuation measures. A business is worth the sum of the future cash flows, and the return on your investment results from the price you have paid for the business. While it is a basic principle, it could lead many investors in the wrong direction. You need to stop focusing on unreliable forecasts or the price-earnings ratio as you could miss the big picture.
Even businesses with negative earnings can generate returns on investment in the long term. It is easy to look at the financials and consider a stock overvalued, but you could be ignoring the leadership, market opportunity, and fast growth. Such things are harder to quantify when the business is in a growth stage. Stop focusing solely on the financials and look at the bigger picture. Identify the potential of the business, the market, and the product. This is how you identify potential 10-baggers and 12-baggers.
Pros and cons
Pros
- Massive returns. The biggest advantage of finding 10 bagger stocks is the potential to generate massive returns. A 10 bagger will grow your investment 10 times and this could be huge. It has happened in the past and can happen in the future but you should be ready to take the risk.
- Low investment. When it comes to investing in potential 10 baggers, you do not have to spend a lot of money since they are not at their peak yet. It is about identifying the growth stocks and when making investment decisions. Hence, the stock could currently be trading at a low rate, only requiring you to make a small investment. To put it in context, Alphabet stock was trading at $85 during the IPO in 2004 and is trading above $2,200 today.
Cons
- Uncertainty. One cannot predict what will happen on Wall Street and the biggest mistake you can do is time the market. The potential of stock becoming a 10-bagger could be high but there is ample uncertainty surrounding it. You will have to keep your emotions in check and not sell the stock once it doubles. Uncertainty is everywhere and standing still in a storm can pay off in the long term.
- Market volatility. Stock investments are subject to market volatility and it affects every investor. There is no guarantee that your investment will continue to grow in a linear line. Some of the best stocks go through the biggest ups and downs while generating a solid annual return for investors. If you are always worried about the market movement, you might not be able to find the 10 bagger stock.
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The bottom line
Warren Buffett usually labels multi-baggers as those with economic moats. It is a particular advantage that a company has over its competitors, and these advantages help it protect itself from the other companies in the industry. But you must not confuse it with having a well-known brand. That may be a good indicator, but not all companies with a strong brand have the potential to become a multi-bagger. It is the business behind the brand that matters.
Finding 10-baggers can be risky and difficult, but if you can pick a basket of early-stage companies, they could become big winners in the long term. The trick is not only to identify but to hold on to them for the long haul, it will do wonders to the portfolio. You will only need a few multi-baggers in your portfolio with a small minimum investment, and you could be set for life. An investment that can return tenfold is a great way to build a retirement portfolio, but it needs a lot of research and patience.
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Editor
Vandita Jadeja is a financial writer and editor at Joywallet. She loves to read and write about money and brings a decade of experience from the financial industry.
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