Investing -- Multibaggers Are For Everyone!

It's not uncommon for retail investors to feel left out of a discussion on multibagger stocks -- but that doesn't have to be the case. In reality, investing is simpler than many would think. Most investors feel compelled to discover "hidden gems" in their pursuit of the often illusive and elusive multibagger. However, investing -- much like every other aspect of life -- is as much (if not more) about doing the simple things right as it is about finding obscure names that are virtually unheard of. And as it turns out, chasing the obvious is often a great starting point.

Not so 'little' basics -- don't underestimate the obvious

A lot of us don't associate large cap stocks with great investment ideas, largely due to the perception that large caps generate limited gains, at least when compared to lesser-known small companies. While that may be true, it does't mean that large caps don't generate impressive or sizeable returns -- and there are several examples to prove this.

Take, for instance, HDFC Bank, arguably one of the safest stocks in the Indian stock market. Shares of HDFC Bank have risen ~13x in 10 years. In 2008, the stock was available at a price of ~INR 158 per share (adjusted for the 5:1 split). Five years on, in 2013, you could buy these shares at ~INR 528 a piece. Today, the stock trades at INR 2,057, translating to just under 4x returns in 5 years. For an entity of such high quality, these are exciting returns. Personally, I think they are exceptional. I'm not saying they are the best -- after all, there are names like Soril Infra, Indiabulls Ventures, HEG, Graphite India, and even DMart, which have generated upwards of 5x in 1 year. All I'm saying is that, for those who lack the time, knowledge or resources, high-quality large caps are not necessarily a bad option.

Multibaggers are for everyone -- all you need is a little common sense and patience. And if you can multiply your wealth 4x in 5 years by simply picking a rock solid stock like HDFC Bank, you don't necessarily need to stick your neck out, speculating on stocks you're ill-equipped to track and monitor.

And there are plenty other such examples. Let's look at a relatively "boring" example from the FMCG sector, a defensive play, which most traders find mind-numbingly boring. HUL, for instance, has generated well over 3x returns in 5 years -- and the same is true for Asian Paints. You didn't have to be a Warren Buffett or Rakesh Jhunjhunwala to back Maruti Suzuki 5 years ago. Yet, the rewards have not been meagre by any means. The stock has risen nearly 7x during the period (nearly 7.7x at its peak earlier this year).

A lot of us underestimate the obvious, but therein lies the opportunity, for merely being a widely-accepted or obvious choice doesn't stop a company -- and by extension, a stock -- from doing well. Most discerning investors recognise this over time and come back to board the bus they once missed. So, it's probably not a bad bus to catch to begin with. After all, there is value in being a consistent stand-out winner (We love Sehwag and Yuvraj, but we need still need a Dravid). In cricketing parlance, if you can take a single off every ball, you don't necessarily need to always hit the big ones to stay in the game.

That said, what I've presented so far is only one part of the story. There are a few things to bear in mind -- the things that may seem far too obvious are often the most important.

Betting on the right horse

It's not enough to bet blindly on just any large cap. For instance, you would be down 30% over the last 5 years had you chosen to bet on Tata Motors. If you'd picked ITC, your money would've compounded at 7%, which isn't much better than FD returns in India. If you don't back the right stocks in the first place, nearly every theory related to investing goes right out of the window.

Backing your bets

There are two schools of thought when it comes to averaging your buy price -- some vehemently advocate it, while others equate it with throwing good money after bad. However, if you've put your money on the right horse, averaging can be worth every penny. For instance, HDFC Bank started 2008 on a high, trading at INR365 a share, before tanking by 57% to touch INR 158 (the price I mentioned earlier) later that year in the aftermath of the subprime mortgage crisis in the US. Had you bought the stock at its peak in 2008, you'd be 5.6x richer in 10 years, which isn't too bad either. However, if you did back your bet while the stock was tumbling, you'd be a lot richer -- the stock has risen 13x from its low that year.

Interestingly, this was the case in 2013 as well, when HDFC Bank fell by close to 27% in the short span of a couple of months -- and your returns would vary between 2.8x and 3.8x as of today, depending on when you bought the stock during the year. It's not easy to time the market -- a lot of investors even believe it's impossible -- but it is possible to back your bets during tough times. Often, the winners in one cycle aren't winners in the next, but if you have the right stocks, it does pay to back your bets.

Now that they're so big -- understanding the potential

Probably the most common question for new investors and old, especially after missing the bus is -- can I still buy this stock? One of the best things about good stocks is that there's rarely a bad time to buy them. As discussed earlier in the post, it's not easy to time the market, but if you're willing to accumulate shares gradually, you're likely to do well.

For all the stocks in the market, there are only a few dozens of truly impeccable businesses. However, underestimating the potential of large cap stocks is possibly the most common mistake. Not many of us are wired to think beyond the obvious, and I'll use my own experience as an example. A few days ago, I was casually considering the option of investing in Kotak Mahindra Bank. To estimate the opportunity, without giving it much thought, I compared its market cap with that of HDFC Bank, which is today India's largest private sector bank in terms of standalone assets.

This thought process lead me to believe that the opportunity was worth a ~2.3x return, but I quickly realised how wrong I could be. After all, back in 2013, HDFC Bank was still India's second largest private sector bank. How then, did it manage the kind of returns it has? The answer is simple -- ICICI Bank, which was then the no.1 private sector bank in India, was evidently not the right benchmark or yardstick by which to gauge HDFC Bank's potential. The opportunity was, and probably still is, way bigger.

According to a report by the World Economic Forum, which quotes IMF (International Monetary Fund) data, India's GDP was worth $2.85 trillion in 2018, a meagre ~14% of US GDP (the world's largest economy currently), translating to a potential growth of 7x. Bear in mind that the US' GDP is still growing -- it grew by over 5% in 2018, according to the same report, thus adding $1 trillion in GDP for the year, which is about 35% of India's current GDP. Now, factor in PWC's prediction that India's GDP will eclipse that of the US by 2050, growing to $44.1 trillion, and it opens up the possibility of a 15.47x growth in India's GDP.

Assuming that HDFC Bank manages to steer clear of the issues that led ICICI Bank down the road it took, what does India's GDP growth potential mean for India's largest private sector bank? There's no definite answer, but like they say in economics (and I've had my issues with this concept), all else held constant, the opportunity is huge, especially given that HDFC bank is still delivering net profits that are growing at ~20% CAGR (compounding annual growth rate).

A word of caution

Quick pause for trivia -- today, ICICI Bank's market cap is lower than that of Kotak Mahindra Bank and less than half that of HDFC Bank. The bank's current plight is a great lesson for investors not to take things for granted. Even the best investments need to be monitored, though in varying degrees.

My key learning -- chase the obvious

When things get too complicated, it pays to stick to the basics and keep things simple -- that's where large caps come in. Life and stock markets have a lot in common, and probably the most important of them all is the fact that common sense never goes out of fashion.

This article was written on 8 September 2018.

Disclaimer: I am a newbie in the stock market (even after close to a decade), but then markets are such that everybody always is -- predictions do go horribly wrong. Investments in the stock market do not come with any guaranteed returns. I may or may not hold positions in any of the stocks mentioned in this post, and my opinions could be biased. I am not a qualified investment advisor. The content in this post only reflects my personal opinion and should not be treated as investment advice. Readers are adviced to carry out their own due diligence and consult their investment advisors to understand the risks involved in any investment. Trading in stocks and shares carries the risk of monetary loss.