Multibaggers Defined

The other day, on our Investing Beginners discussion board, "ChetE715" asked a question:

I have noticed [a confusing term] a number of times in [Motley Fool] articles -- "a 14-bagger," "an 11-bagger," etc. This brings to mind pictures of a golf bag stuffed with clubs or a game poacher's sacked stuffed with rabbits. Those images are not helping me grasp the concept, so I figured I would just ask.

As usual, helpful community members rushed forward with answers. David K. explained, "Peter Lynch often uses the term '10-bagger,' which is when a stock goes up 10 times in value." "You want as many 'baggers' as you can get in your portfolio; that's all you need to know!" He gave these examples:

  • 2-Bagger: 100% gain
  • 3-Bagger: 200%
  • 4-Bagger: 300%
  • 5-Bagger: 400%
  • ... and so on and so forth.

TheHedgehog then chimed in with a sensible word of warning: "Actually, if your investing technique is to seek baggers, your portfolio will likely consist of a lot of 0-baggers, or at least a lot of somewhere between 0 and 1 baggers." CABob added, "and probably a few negative baggers."

They have a point -- to a point. I agree that if you place the desire for enormous returns above your desire to find compelling, undervalued investments, your investments may not turn out as impressively as you hoped. Remember that high returns are often correlated with high risks. A lottery jackpot offers an enormous return for your dollar ticket, but only with the near certainty that you won't win it. Similarly, chasing highfliers carries with it the risk that some of those rockets will crash back to earth with a bankruptcy.

Still, it's not silly -- as long as you have a sensibly constructed portfolio (ever heard of "Index Plus a Few"?) -- to aim high and attempt to uncover some multibaggers of your own. Part of the trick is patience. If you call it quits on a stock that has doubled for you, you'll never give it a chance to become a 3-bagger or more. But the bag-gage needs to be kept in perspective. If the company is still firing on all cylinders with great growth prospects, you might want to hang on. If it has far surpassed a reasonable stock price or has been losing some of its competitive advantages, selling might be best.

Multibagger investments are not so rare, and they needn't be tied to high-flying Internet companies. MetLife (NYSE: MET  ) , in the not-so-exciting field of insurance, has been roughly a 2.5-bagger in less than six years, representing a strong average annual return of around 17%. Starbucks (Nasdaq: SBUX  ) has been a 12-bagger over the past decade, with an average annual gain of 29%. And over the past 20 years, Procter & Gamble (NYSE: PG  ) has rewarded investors with 19 bags, gaining an average of 16% per year. (These examples assume reinvested dividends, if any.)

In closing, Jbking has further explanation for the term "bagger": "The term '10-bagger' is usually attributed to Peter Lynch, who has written a few books on investing and was a star fund manager when he ran Fidelity Magellan (FUND: FMAGX  ) ." He then quoted Wikipedia.org, crediting Lynch and explaining that a 10-bagger "refers to an investment which is worth ten times its original purchase price and comes from baseball where 'bags' or 'bases' that a runner reaches are the measure of the success of a play. A 'two bagger' would be a double, so by extension, two home runs and a double would be a 'ten bagger.'"

Bag more multibagger-related Foolishness:

Here's to many multibaggers in your future portfolio!

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Starbucks is a Motley Fool Stock Advisor pick.

If you're looking for some multibagger ideas of your own, consider taking advantage of a subscription to one of our newsletters. They've gotimpressive track recordsand sport many multibaggers among their recommendations. OurMotley Fool Hidden Gemsnewsletter, for example, in less than three years, has racked up five 2-baggers, along with a 3-bagger and even a 4-bagger.

SelenaMaranjian'sfavorite discussion boards include Book Club, Eclectic Library, Television Banter, and Card & Board Games. She owns shares of Magellan. For more about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.


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