As from April 2013 my Journey in Investing is to create Retirement Income for Life till 80 years old for two over market cycles of Bull and Bear.

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Friday, 4 September 2009

Multibaggers and Compounding - Their differences

Some investors or intelligent speculators use Buy and Hold strategy to get multi-bagger stocks if they are right. Where can we probably find multi-bagger stocks?

1) Penny stocks - high risk, high return
2) Speculative stocks - high risk, high return
3) Severely Undervalued stocks - low risk, high return

It is difficult for the Magic of Compounding to work its magic in a Buy and Hold strategy even with dividends re-invested as dividend income is too small to have any impact.

Do you have that type of risk appetite for high risk, high return? If you don't, then Option 1 and 2 are out for you. You are left with Option 3.

With Option 3, you believe that you are smart enough to find severely undervalued stocks while the rest of the market players have missed them.

Do you believe that on the pavement there lies a $50 note, and everyone stops and looks carefully at it and then walk away without picking it up as he/she concludes that it is a fake $50 note.

But, you are so smart to realize it is a real $50 note, pick it up and put it in your pocket and happily walk away. How often can such things happen? The Market is never short of smart people.

Comparing to finding the potential multibagger stocks without taking too much risks, it is probably easier to let the Magic of Compounding works its magic for you and over time you will have the similar multi-bagger effect.

For example:

You bought 10 lots of Stock A @ $1.00 for $10K and then subsequently sold 10 lots @ $1.20 for $12K, and not considering brokerage fees just for a simple illustration. When the Stock A pulls back to $1.1, you could buy back 10 lots of Stock A @ $1.1 for $11K.

Now, you still have the same quantity of Stock A as before but with some extra cash ($1K) to add to your free capital pool to buy other shares. This is what compounding is all about.

What if you fail to buy back Stock A? It doesn't really matter as long you manage to buy the same quantity of Stock B which is less than $1.20 in your watch list and you will still have the extra cash ($1K) added to your free capital pool and the magic of compounding is still working.

Do you really care it is a Black Cat or White Cat so long it catches mice?

BUT, you must be successfully at your stock picking in either strategy.

So how? multi-bagger or compounding? The choice is yours.

2 comments:

  1. Hi CW8888,

    I think the real problem is in classifying what category a stock is.

    For example, during the Oct'08 to Mar'09 phase, even stocks like Keppel Land were in penny stock status, not to mention stocks like Ho Bee which was down to 28 or 29 cents.

    Looking at it now, in hindsight, one should have picked up Ho Bee, but at that time, it was not an obvious choice.

    Multi-bagger hunting is a very risk-fraught pursuit, and chances are 9 out of 10 one would fail.

    Realistically, one can at best hope to beat inflation by a couple of percentage points, if one is very good at it.

    Just my two cents worth.

    Regards

    V

    ReplyDelete
  2. From 1961 to 2008, the average inflation rate is about 2.7% so the targetted ROC is about 5-7%.

    ReplyDelete

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