10-bagger (n): A stock whose price multiplies 10 times over, leaving the shareholder euphoric, giddy, and ... rich.
Individual investor (n): An adventurous hunter waiting for that trophy buck -- i.e., you.
We all want a few 10-baggers to mount in our investing display case. Peter Lynch said it best when he coined the term in his iconic One Up on Wall Street: The more right you are about any one stock, the more wrong you can be about all the others and still triumph as an investor.
Let's illustrate this point: You'd need to lose 100% on nine separate stocks to cancel out the effect of just one 10-bagger. And if you merely lose an average of 10% on every other stock you own, you'd need to hold a whopping 90 mediocre investments to cancel out just one 10-bagger. The effect is that powerful on your portfolio.
Imagine the benefits a 10-bagger or two can offer when you're not making 90 lousy investments in a row.
Once burned, twice shy
We can all appreciate this fairly simple mathematical thinking in the proper context -- but we rarely implement it in our investment practices. Why?
Thanks to our ancestors’ days of battling sabertoothed tigers and perfecting the flight-or-fight response, a large part of our investing brains is hardwired by emotion. This same side of the brain cringes when the market takes a dive, tells you to change your approach after three or four investments have gone sour, and urges you to hide in fear when you should be getting aggressive.
Missing 10-baggers is generally the result of one of three things:
- A lack of patience.
- An abundance of fear.
- A failure to swing the bat frequently enough to hit a home run.
Swing big and strike out a few times, and it becomes tempting to bat for singles and doubles -- or, heaven forbid, to head for the bench and call a financial advisor to stick it all in mutual funds.
But the great investors know that staying in the game makes all the difference.
Swing early and swing often
Shelby Davis owned literally thousands of stocks -- and turned a $50,000 initial investment into more than $900 million by the time he retired. He reaped huge gains from baskets of great companies, and he got in early on stocks like American Express (NYSE: AXP ) and Travelers (NYSE: TRV ) , exercised some mental discipline, and just let them ride.
Such 10-baggers have made other careers, too. Look what Motorola (NYSE: MOT ) did for Philip Fisher, or what Amazon.com (Nasdaq: AMZN ) has done for Bill Miller at Legg Mason.
Ralph Wanger of Acorn Investments said, "I might have owned 300 stocks at any given time; most disappeared into the laundry basket. But 10 might go up many times in value, and they made all the difference." Not every investment turned out to be gold -- but the ones that did easily carried the rest of his portfolio.
So how did all these investors catch the elusive 10-bagger amid the lesser opportunities? They bought -- and held -- great companies.
Amen to that
We're well on our way to two 10-baggers of our own in the Motley Fool Stock Advisor investment service. Marvel Entertainment (NYSE: MVL ) -- an eight-bagger -- and Activision (Nasdaq: ATVI ) -- a nine-bagger -- represent 43% of our total returns across the service. The power of returns like that is huge.
It's hard to predict which stocks will go on to 10-bagger status – but with every great company you invest in, the probability goes up that one of them will. Like the Virginia lottery commercials say, you've got to play to win.
As an analyst on the Stock Advisor service, I expect I'll see several 10-baggers in the years to come. Just as an example, I think Under Armour (NYSE: UA ) stands a fantastic chance of blowing away expectations with its top-notch brand, miniscule valuation, and a market opportunity that's immense. There are many others.
If you'd like to take a risk-free look at our past and present recommendations, click here for a 30-day free trial. There's no obligation to subscribe, and you'll find dozens of great companies and a few that just might make your trophy case.
Nick Kapur is on his way to 10-bagger status with his shares of Marvel Entertainment. Amazon, Marvel, and Activision are Motley Fool Stock Advisor recommendations. American Express is an Inside Value selection. Under Armour is a Hidden Gems and Rule Breakers pick. The Motley Fool owns shares of Under Armour and American Express. The Motley Fool has a disclosure policy.