#InvestorEducation: “How To Invest In A Multibagger Stock?”

19 May 2018by Research and Ranking

#InvestorEducation: “How To Invest In A Multibagger Stock?”

Investors like Mr. Fickle are commonplace in the Indian stock market. What’s more astounding is their understanding of the company’s business model before they invest in them.

In the digital era, it’s so easy to buy or sell in a stock market. Get an online broker, fund your account, click on the stock, click on buy, and Voila! You just purchased the shares of a company. However, what next? Are the investors mindful of the risks inherent? Did the investors conduct fundamental analysis of stocks? Are the investors cognizant about the growth prospects? The answer to most of these questions is normally a BIG NO.

Stocks like Eicher Motors, MRF have grown 5-10 times, but were these stocks only moving uphill?

Let’s take a chart of Eicher Motors, a stock which grew 9-10 times in the last 5 years.

During this bout of growth, the multibagger stock plummeted by more than 15% for at least 3 times in these last five years. As you can see in the graph, the highest fall was recorded between the period of July 2015 to December 2015, where the investor’s earnings in this stock were eroded by more than 25%. Someone like Mr. Fickle would have lost his patience and would have exited the stocks, oblivious to the reason behind the stock fall. All he would have been concerned with is the market price of the multibagger stock. However, investors who scrutinised the financial statements and took time to conduct the fundamental analysis of stocks clung to this stock to reap better returns in the future. Investing is all about rigorous research. The more you study the companies and the sector, the better are your possibilities of success in the Indian stock market.

Companies like Eicher Motors and MRF didn’t turn 5 times or 10 times multibagger stocks in a day. Behind this stock is a business, whose value takes time to surface. You need to be patient while investing in such stocks and keep the media hype and rumours at bay. Conducting periodic review of such stocks to ensure that their fundamentals are still intact only adds to the probability of favourable returns in the Indian share market.

“Stocks aren’t lottery tickets. There’s a company attached to every share.” - Peter Lynch

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