Have you ever heard of a 10 bagger? If not, it’s because you’ve never had one!!
Don’t worry, neither have I…yet! I am destined to get there someday, hopefully sooner than later, but it’s all about sticking to the process!
So, what exactly is a 10 bagger? Well, it’s simple – it’s simply a stock that is now worth 10 times the price that you initially paid for it. That means a $10 stock is now $100, or a $40 stock is $400, or the Amazon share that you bought on 4/21/20 for $2,328.12 is now worth $23,281.20…speaking of, isn’t it time for Amazon to have a freaking stock split??
So, who is the genius that coined this term? Well, it’s Peter Lynch. Not the GOAT (Warren Buffett) but quite possible on the Mt. Rushmore of investing!
Personally, I think that Peter Lynch is one of the best sources of information that one could gain if they’re looking to learn about investing in the stock market. He has written multiple books, with two of his most well-known being ‘Beating the Street’ and ‘One up on Wall Street’, but one of the things that I love the most about Peter Lynch, are all of his amazing quotes, and in fact, Andrew and Dave had an entire podcast where they talked about some of his very famous quotes and expanded on them.
Some of my favorites are:
“All the math you need in the stock market you get in the fourth grade” and “Know what you own and know why you own it.” I love his quote about math because it’s so true. You’re simply taking numbers and adding, multiplying, subtracting and dividing them all together – that’s it.
Yes, of course, it’s more complicated than that, but the only thing that stops you from being able to do the math and crunch the numbers, is you!
And his second quote seems so obvious but it’s not, especially to the new investor. Understand what is in your portfolio and why you bought it, or why you’re considering selling it, and understand what they do! Dave has previously talked about how he keeps notes on his stocks to remind him on his feelings or things he’s considering, such as a reason to purchase or things to consider in the future such as potential pitfalls, so that he can make sure he’s staying a sane investor.
So, who even is Peter Lynch? And why does he get to make up his own vocabulary? Well, Peter Lynch managed the Magellan Fund at Fidelity…EVER HEARD OF IT? Kind of a big deal.
But he didn’t just start there. He worked his way up through the company and went from intern to Fund Manager in just 11 years, which is pretty impressive in its own right.
The term was actually coined from a baseball term where when a baseball player gets triple, it’s called a 3-bagger, or a double is a 2-bagger, and so on. Essentially, the player grabbed three bags, or bases, when they hit their triple, effectively being three times better than a single. And before you get all sabermetric on me about OPS+ and WAR, just stop. We can talk that when baseball actually comes back.
Essentially Lynch was looking for a way to describe his investment philosophy for these stocks where the goal is basically to find stocks that can continuously compound on top of one another year after year after year.
Lynch was notorious for having many different 10 bagger stocks in his portfolio at Fidelity, inducing Taco Bell, Ford, GE and Dunkin Donuts, all major brand names that you have likely heard before. Given the fact that he was only the Magellan Fund manager for 13 years, that’s pretty stinkin’ good!
Normally at this point I would go into an in-depth analysis about why a 10 bagger is such a good thing, but I think it’s pretty simple. You bought something for 10% of what it is worth now! That is a huge return and something that we should all be extremely proud of. A logical next question would be to think about how you can find a 10 bagger stock.
As always, I think that the best way to find any stock, not just a future 10 bagger, is to find a company that is undervalued to their intrinsic value but also has a very promising future. There are many ways to do this, but my #1 is for you to look at the Value Trap Indicator which will take many common metrics and help to show you where there could be some potential strong buys for your company of choice.
Investopedia wrote a really good article on 10 baggers that pushes you to think outside the box a little bit about what sort of qualitative data might be worth thinking about when trying to identify a future 10 bagger:
In summary, you’re really looking for a stock that is going to shake up the game a lot from how things are currently being done. Unfortunately, this could likely mean that the company is not going to be undervalued vs. their intrinsic value as so many companies nowadays will just go bonkers on their IPO, despite potentially having negative earnings still. I’m thinking Tesla, Uber, Lyft, Beyond Meat, etc., etc.… all names that you’ve likely heard of.
That doesn’t mean that you should stretch your comfort and purchase a company that doesn’t fit your checklist but instead you need to just focus on being patient. Sometimes you’re going to miss out on a company that goes insane for no apparent reason other than their hype, but are you really focused on the hype of the company?
Hype is speculation, and speculation is gambling, plain and simple.
Identifying a 10 bagger takes focus, patience, and a plan – if you don’t have any of these then you’re never going to get that first 10 bagger.
I’m still chasing mine…maybe it will be one of these High ROIC stocks that seem to be poised for success, or maybe it will be a completely different stock, but regardless, I’m going 100 MPH until I can get there.
Good luck in your journey – you better let me know when you get there!