Multibagger Guide #2:-Steps for generating multibagger return
In our previous multibagger guide we have discussed about several features of multibagger stocks.If you missed that CLICK HERE TO READ NOW. We have also mentioned the four steps of generating multibagger return.They are-
- Selecting the right company
- Buy the stocks of that company at right price
- Holding the stocks until the market recognize its full potential.
- Sell the stock at right time and book profits.
In this multibagger guide we are going to provide a brief description of those above mentioned 4 steps.
1.Selecting the right company-
First of all you have to select the right company with quality management with huge growth prospective. The company should belong to an industry which is either new or experiencing a positive change from which the company can get the most benefit. You have to select early when the full potential is not realized by the market because only this time the company is available at cheap valuation. We can illustrate the fact from the example of Zee Teleflims and Hero Honda in 1993. On that time the sector was experiencing a positive change but the market did not recognize the full potential.
We will discuss later in the series of “multibagger guide” articles and provide the criteria for recognizing right company to become a potential multibagger.
2.Buy the stocks of that company at right price:-
After selecting the right company you have to look at its valuation. If the stock is already overvalued then it can be assumed that the market already recognize its full potential. If you buy that time then the chances of generating multibagger return will be reduced. Although you can get a decent return from the stock if you hold it for long time. But we won’t discuss about this in this series of articles. We only focus on generating multibagger return. The best time to buy the right stock is when it is available at cheap valuation. It will be great if you can buy the stock when Price to Earning ratio (P/E ratio) is below 10, Price to book ratio (P/B ratio) is below 1 and Price to sales ratio is below 1. As investing in multibaggers contains some inherent risk, the risk can be eliminated to a further extent if you can buy the stock at cheap valuation. There are also several parameters to judge the valuation of the company. We will discuss later in this series of articles.
Now consider the scenario that the right stock that you have selected is not available at cheap valuation. Then you can do any of the two below mentioned things.
- Wait for a market panic so that the valuation can become reasonable. In some market crash all the companies whether good or bad fundamentals have experienced some crash in its stock price. At this time if the fundamentals of your selected company remains unchanged then you can buy the stock.
- Even the best company of the world can’t deliver outstanding results quarter after quarter. If there are some temporary problems in the company or even the entire sector then the company can available at reasonable valuation, which is a good point to buy the stock. But remember the problem should be temporary (like high interest rate) and it would not affect the fundamentals of the company.
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3. Holding the stocks until the market recognize its full potential:-
Selecting right company and entering at the right price is a skill but holding the stock is less a skill and more of an attitude. Multibagger stocks experience more volatility than the overall market. So in some market crash the potential multibagger stock will experience more downfall than the overall market. If you are not ready for such a downfall then multibagger investing is not for you. You have to hold the stock during those tough times if the fundamentals remain intact. However you can also add position. Normally a stock takes at least 5 years to generate multibagger returns. During that period you will go through several price volatility,self doubt and pain but you have to overcome all those until there is any change in fundamental.
4.Sell the stock at right time and book profits:-
Selling is the most challenging. It may happen that after selling the stock generates 100% return within 1 year. But you have to admit the fact that you can’t buy a stock at its bottom and sell it at its peak. Timing the market is next to impossible. So don’t try to time the market. Rather than sell the stock if any of the following thing happens-
- The stock becomes overvalued. (P/E greater than 40, P/B greater than 10 and Price to sales greater than 50).
- If the market becomes overvalued. (Sensex or Nifty begins to trade at P/E ratio greater than 25).
- If the fundamentals of the company changed.
- If you can find a better option to invest your money in some other potential multibagger.
However we will discuss each and every point later on in this series of article “multibagger guide”.
In our next multibagger guide we will discuss about the different phases of a multibagger stock in its entire life cycle. So stay tuned with us.
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