Do You Have What It Takes to Bag a 10-Bagger?

The Holy Grail of investing is Peter Lynch's "tenbagger," which he made popular in his book One Up on Wall Street. That's investing in a company long enough in order to see it rise to 10 times what you paid for it. Like Cisco Systems (NASDAQ:CSCO) between 1995 and today. (Yeah, yeah. I know Cisco was better than a 30-bagger at one point, but it's still a 10-bagger today.) Getting one or two of these can put you well along the path to investing success.

But they're not easy to bag.

Note, I didn't say they weren't common. Here are just a few companies out of the hundreds that have become 10-baggers over the years.

Source: Capital IQ, a division of Standard & Poor's.

What I said is that these are not easy to get. And the reason is because of the way many of us invest. 

Give me my money!
Now I'm no investing expert, but I do know that we have several tendencies that hurt our returns. Luckily, true experts like Peter Lynch have shown the way to overcome them, and one way is through patience.

For instance, there are often long periods of time when a stock's price doesn't do much, and we get frustrated, impatient to put the money to work elsewhere. Peter Lynch addressed this point when he wrote about Merck (NYSE:MRK) in his famous book:

This stock went nowhere from 1972 to 1981, even though earnings grew steadily at an average of 14 percent a year. Then what happened? It shot up fourfold in the next five years. Who knows how many unhappy investors got out of Merck because they were tired of waiting, or because they yearned for more "action."

Each of the above companies has had significant periods in which their prices seemed not to be going anywhere, instead of rising steadily. But unless investors held on through these periods, they didn't see the massive gains.

Now!
After a 50% or 100% rise, we often become impatient and anxious to put the money to work elsewhere. But when we do that, we automatically prevent ourselves from bagging that 10-bagger. For instance, from the start of 1994 to the end of 1996, investors in Starbucks would have seen a 154% gain. Not bad. But, if they had accepted just that, they would have missed out on a total 1,480% gain. If Lynch had given up returns like that, he would have been an OK investor instead of the phenomenally successful one he was.

And don't lose any!
Finally, it is really hard to be patient when the price declines, sometimes by a lot. Lynch gave several examples in his book of stocks dropping 50% or more after he bought them, only to end up with a very sweet return. Each of the above companies saw at least one drop of 25% or more during the time it rose tenfold. Lynch has pointed out how volatile stock prices can be, and another expert by the name of Warren Buffett -- maybe you've heard of him? -- has said that if you can't stomach a 50% drop in a position, you shouldn't own it.

I'm not saying that such a drop is pleasant or you shouldn't go back and revisit your thesis. It isn't and you should. But given that, we have to realize that stock prices are volatile, and sometimes they go down when we'd rather see them go up. And sometimes the best thing we can do is just hang on to the roller coaster.

Or, in the words of Lynch, "Stick around to see what happens -- as long as the original story continues to make sense, or gets better -- and you'll be amazed at the results in several years."

Here's your 10-bagger
Over at the Motley Fool Stock Advisor newsletter service, we're Lynchian investors all the way. Our minimum outlook is three to five years. This gives our investment thesis time to play out, just as Lynch advised. And right now, we've got two 10-baggers on our scorecard.

To find out what they are, and to see what other companies might turn into 10-baggers for patient investors, check the service out with a free 30-day trial. I'm confident that a few years from now, you'll be glad you did. There's no obligation to subscribe.