Ten Bagger

An investment that increases value by ten times its initial price

A 10-bagger is an investment that increases value by ten times its initial price. Ten bagger stocks have a 1000% return on investment (ROI). For example, an investor buys a stock for $10, and the value goes up to $100.

Fund manager Peter Lynch created the term in his book One Up On Wall Street. Peter Lynch was the manager of the Fidelity Magellan mutual fund in the 1980s and 1990s.

Lynch borrowed the term "baggers" from baseball, where "bags" or "bases" that a runner reaches are a way to measure the success of a play. 

He liked to use the term "multi-bagger" to describe a stock that had great success, and specifically a "ten-bagger" to refer to a store that multiplied in value by ten times. 

Back in the 1980s, it meant buying a company with high growth potential and a cheap valuation compared to its competitors. Today, stocks that have gone up over 10x in value, like Netflix, Amazon, and Tesla, are all ten baggers. 

The term is commonly used to describe stocks in high-growth industries and emerging markets. These stocks have high growth potential and are more likely to grow 10x than a sizeable blue-chip company that has been around for a long time. 

For an investor to achieve a ten-bagger, they must stick with an investment for a long time. It is often easier to accomplish a 10-bagger when you invest during the early stages of a company. However, it is still possible to achieve one even if you invest in a well-established company. 

Peter Lynch's book documents his own ten baggers, which led to the growth of the Magellan Fund from $18 million to over $19 billion. Lynch's annual rate of return was around 30%, which is a shockingly high rate to achieve consistently over many years. 

Lynch achieved this by targeting undervalued stocks that he thought had high growth potential. He also found many multi-baggers from companies he learned about daily, such as Dunkin' Donuts.

Future ten bagger investments are all around us. To find one, you must witness and identify new fast-growing companies and stick with them once you find a good one. 

Understanding the concept

Peter Lynch discovered and invested in numerous ten baggers over his career when he was the fund manager of the Magellan Fund. As a result, he grew the fund's assets from $18 million to almost $19 billion, a tremendous return on investment. 

If you invested $1,000 in Lynch's fund in 1977, it would have grown to $28,000 by the time he left in 1990.

Lynch had specific strategies for finding stocks with tremendous growth potential. First, he preferred stocks with a price-to-earnings (PE) ratio below the industry mean, which means they were priced cheaper than their competitors. 

He also preferred stocks with a P/E ratio lower than the five-year average, which meant that the stock was trading for a meager price compared to its history. 

Lynch thought it was important to buy stocks cheap because this only gave more room for growth and achieving that rare 10x return.

He also looked for stocks with a high five-year growth rate in operating earnings per share (EPS) but no higher than 50%. An EPS growth rate of over 50% was unsustainable and would attract competition, according to Lynch. 

A common misunderstanding of ten baggers is that the only way to achieve one is to invest in the very early stages of a company. This is not true.

In an interview with PBS, Lynch explained that Walmart was an example of a ten-bagger that investors could have bought late. Even if you purchased Walmart 10 years after its IPO, you would still have made 30 times your money or a 30-bagger. 

Lynch also explained the importance of observing new companies in your everyday life in his book. An example he gave was Dunkin Donuts. Peter noticed a bunch of new stores around him, and they were always swamped every time he visited one. 

Lynch noted this and decided to do more research on the company. Simply observing that a company is always busy or has good products is not enough evidence that it will become a ten-bagger. However, in Lynch's case, Dunkins did end up appreciating over 10x in value. 

Another example of this is Mcdonald's. Many people visited Mcdonald's in the 1970s and enjoyed their food and service, probably taking notice of their success. If any of these people decided to buy Mcdonald's stock at this time, they would've achieved well over a ten-bagger. 

How to find a 10-bagger

It can be very challenging to discover a ten-bagger; some even think it is impossible to screen for one. But, according to Lynch, It is more important for investors to invest in what they know, support for the long run, and do their research than strictly hunt for teabaggers. 

Despite the challenges of searching for that rare 10x investment, there are some strategies that you can use to boost your chances of finding one. If you are hoping to find that elusive ten-bagger, then you might want to look for the following types of situations:

1. New technology: Look for new technology that has a large potential customer base, can be easily used by the general public, and has the potential to be around for a long time. 

Technology drives the stock market, so if you can become an early investor in a leading high-tech company, you will have a high chance of finding a multi-bagger. 

2. Societal trends: Following societal trends is a critical element of many ten-bagger stocks. More people adopting a specific technology or viewpoint should become more critical to investors. 

Some current societal trends to look out for are the rise of technology, climate change/resource scarcity, ethics, responsibility and sustainability, and the rising average life expectancy. 

3. Government action: government action can play a massive role in the volatility of stock prices. The government can create new regulations and laws anytime that could disrupt markets. 

It is essential that your potential ten-bagger is supported or not hurt by government regulations. 

4. New products: Similar to new technology, companies that come out with new products that fit the desires of consumers are more likely to become ten baggers. The most crucial function of new products is to fill the needs of consumers. 

5. Investor interest: When looking for a potential ten-bagger, you will want to find a company that people are interested in. It is doubtful that you will find a hidden gem company that no one knows about that becomes a ten-bagger. 

With that being said, it still helps to find a company with high investor interest in the early stages of its popularity. You want to invest before it starts to appreciate quickly so you don't miss out on massive returns. 

Key attributes

When looking for a ten-bagger, investors should look for several attributes within the company along with the situations listed above. 

These attributes are:

  • Size of the company: In a closed economy, larger companies tend to grow slower than smaller ones operating in the same economy. 

A large company usually cannot grow more significantly than the whole economy. Therefore, as a company becomes more extensive, the growth rate continues to slow down until a certain point where it stops growing at all, and the company becomes stagnant. 

When you put your money into an already large company, your chances of multiplying your initial investment tenfold are slimmer. 

If you are seeking a 10-bagger, you should invest in small-cap stocks or early-stage companies to increase your chances of acquiring a ten times return on your investment.

  • Company valuation: The price of a stock relative to its value is significant to take note of when trying to acquire a ten-bagger. Ideal stocks for investing in are those with a low price compared to their earnings and a high potential to increase in value.

If you purchase an overvalued stock, you are unlikely to receive a high return because the store was already expensive when you bought it. 

You can look at ratios such as the P/E ratio and P/B ratio to determine the relative value of stocks and the earnings per share to determine how profitable they are. 

  • Operating environment: For a business to become a multibagger, it needs to be in a good business operating environment. This means that it should be in an environment that does not inhibit growth.

A good business operating environment includes fair tax laws, good technology solutions, and fair competition. 

The company should also have strong fundamentals to drive growth. The business cannot grow without underlying solid fundamentals, even if the perfect environment. 

These fundamentals usually consist of high profitability, low debt, high growth potential, and unique products or services. 

Essential Principles

Investors should follow certain principles when looking to obtain substantial investment returns. 

One of the most important principles is starting small. Of course, achieving a ten-bagger from a large company is possible, but you are more likely to obtain a tenfold return on a small company. 

Small-cap stocks have a market capitalization of $300 million to $2 billion. Since their market cap is much smaller than large-cap companies, they have a much higher potential for growth. 

For example, a large-cap company like Apple has over a $2 trillion market cap. So for Apple to become a ten-bagger, its market cap would have to exceed $20 trillion, which is pretty much impossible. 

However, if you invested in Apple as a small-cap, you would have had a ten-bagger. 

Another essential principle to follow is diversification. Chasing ten baggers can be a risky investment strategy, but diversification can help mitigate that risk. 

Diversification means owning multiple different stocks in your portfolio. Just don't put all your eggs in one basket. Owning multiple high-growth stocks will also increase the chances that one of them ends up as a ten-bagger. 

For example, if you own 20 different high-growth potential stocks, then there is a good chance one of them will be a ten-bagger. Venture capitalists also use this strategy when investing in many other high-growth likely startup companies. 

Investors should also hold their investments for the long term. An investment can grow tenfold in a year or two, but most stocks take around ten years to achieve this type of return. 

If you sell your stocks before a year of holding them, you will also lose returns to capital gains tax. Therefore if you are seeking a ten times return on your investment, you should have your stocks for a very long time. 

Real-life examples

It is scarce for a company's share price to increase tenfold, but several companies have done it. 

The following companies all had an ROI of over 1,000% from 2009 to 2015:

As Peter Lynch said, finding ten baggers is not easy, but if you are aware of the emerging companies around you, it will be much easier to spot one. 

Many people probably remember Netflix as an online DVD-by-mail business in its early stages. However, if you decided to invest in the company back then, you would have found yourself a 10-bagger. 

Predicting a stock's future can be challenging, so to successfully acquire a ten-bagger, you must be willing to hold the store for an extended period through the ups and downs. 

All of the above examples had times when the stock decreased in value. Therefore, the most crucial rule when acquiring a ten-bagger is to stay dedicated and not sell when the company dips slightly. 

Finally, remember to be patient. Searching for a 10-bag investment will require a lot of research, reading financial statements, and time spent looking for new companies. 

Unfortunately, no matter how much research you do, there is no surefire way to ensure that your investment will produce over a 10x return. 

The best way to increase your chances is to look for the specific scenarios in the article and the key attributes to look for in a company. Following these steps will give you the best chances as long as you can remain patient and dedicated. 

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