Peter Lynch, the fund manager legend from the Fidelity Magellan fund first used the phrase "ten bagger" in his excellent book, One Up On Wall Street. The term actually comes from baseball, but Lynch uses it to describe stocks which have risen in value by ten or more times! To the amateur or newbie, the idea of making a 1,000% profit may seem a little extreme, but Lynch built a reputation and his fund on this very ability.
For example, in the UK between July 1996 and July 2006, there were a number of companies that can be described as ten baggers. In fact, there were 19! A few had passed the 1,000% growth mark and then fallen back in price, but the opportunity was there.
The largest of these share prices grew by a staggering 3,049% (Anglo Irish Bank Corporation PLC), the lowest was Goodwin PLC, up by a very respectable 904%. Other notable performers included: Numis Corporation PLC at 2,021%, Savills PLC at 1,271% and Amstrad PLC at 997%.
As you may imagine, this period included the dot com boom and bust, so companies that showed amazing growth, only to lose the vast majority of the gains are not included in the 19.
The sectors which are best represented in the list of 19 ten baggers are not what you might expect. Rather than being the glamorous sectors like telecoms or mining, they are actually finance, real estate and construction.
Peter Lynch operated in the United States, on the Dow Jones not the FTSE, but still there have been more than enough superstar stocks on the New York Stock Exchange for him to work with.
UK stock market legend Jim Slater described in several of his books that, "elephants don't gallop". In other words, big companies generally take a lot of work before they can make big gains. It ought to be easier for a $20 million company to double in size than for a $2 billion company to do the same. The companies mentioned above seem to prove him to be correct as the majority of the firms are small by FTSE standards (even after the tremendous growth).
Peter Lynch revelled in the fact that his family could spot rising stock market stars before Wall Street could. He believed that most Wall Street analysts, fund managers and stock traders lived in something of a bubble that was removed from reality. In contrast, most housewives knew what was selling and popular.
Thus, his theory that with the right mindset and effort, anyone could become a successful investor. Having spotted firms that seemed to be trading successfully and had products that people wanted, he would then swing into action and investigate thoroughly. One of his maxims was to "invest in what you know".
In this regard, his thinking is very similar to that of Warren Buffett. Buffett often describes his "circle of competence" and Lynch suggested that we "invest in what we know". The key point here is that by investing in companies whose products and services we do not understand, we increase our risks substantially. How can a person really assess purchase price and asset value if they don't know what they are looking at buying?
On one level, that means that by reading widely and gaining a better understanding about the business world it is possible to open up more opportunities, on another it means that we simply need to recognise our limitations as investors and individuals. This is about being realistic and not having misplaced optimism.
I have a sneaking suspicion that both Lynch and Buffett rather enjoy(ed) their ability to act contrary to the current received wisdom and be proved right so publicly by their annual percentage returns. These results are audited and published for university professors, fund managers and the rest of the investment world to see.
This is something of a very public snub to the legions of financiers that believe in the Efficient Market Hypothesis (that prices move randomly and cannot be guessed) and Information Theory (which suggests that all known information about an asset is known by all buyers and sellers and is therefore "in the price").
Main Street Not Wall Street
Peter Lynch was always proud of his ability to spot companies that were doing well because his "wife changed her shopping habits". This particularly pleased him because it was the kind of thing that anyone should be able to do and as a starting point to selecting companies to investigate, it doesn't get much simpler.
He felt that the disconnected relationship between Wall Street financiers and Main Street shoppers was wrong. In his books he pointed out several situations in which ordinary common sense was missing on Wall Street where almost anyone with any sense could have done better. While his book came many years before, the madness of the sub-prime lending disaster in the United States would be one such example.
He also takes careful aim at the reports issued by analysts and suggests that many are worth less than the paper they are written on. He apparently used to have a framed analyst report hung on the wall in his office. The recommendation was apparently to "buy" the stock and was published the day before the company declared bankruptcy...
He clearly lays out his formula that explains how to buy a ten bagger stock, though to find out, we suggest you buy the books.
Are We All Equal?
It is a testament to his clear thinking and writing style that virtually anyone could read his books and believe that they have "what it takes" to become a successful investor. If anything, this is possibly the only element of his books that I find to be misguided - we clearly are not all capable investors or we would all be picking ten baggers and Peter Lynch would not be famous!
In this regard, the operation of the stock market has altered dramatically since Lynch's time. It is much less clear that the average investor can do as well as was the case in his time. A professional fund manager or asset allocator will have a bank of screens from companies such as Bloomberg and Reuters, and screens showing MSNBC and CNN, to monitor movements on the stock exchange second by second.
Even worse, the world of massive computing power, algorithms and co-location has clearly shifted the balance towards big fund managers and operations with significant resources.
These operations stand astride the world's leading markets, including the NYSE and NASDAQ, trading globally 24 hours each day. They are firms, funds and personalities that are the news in the Wall Street Journal, rather than reading it as the rest of us do.
Despite this Mr Buffett still sticks with his concept of having some stocks that he will "hold forever", so perhaps the little guy can still do well in investment markets simply by being different and sticking with the plan.
It may be the case that not having these screens and news outlets is an advantage. Not being distracted by the 24 hour news cycle and simply focusing on finding the few great stocks that can be held for years might well be the best strategy for an asset allocator.
Your author has read, and can recommend, both books to novice and intermediary investors. One Up On Wall Street even made me laugh out loud on a couple of occasions, which is something of a rarity in books about investment! Both books (One Up On Wall Street and Beating The Street) have sold over 1 million copies around the world.
To read more related articles, please visit:
Beginners Guide To The Stock Exchange
Beginners Guide To The Stock Exchange - Part 1
Beginners Guide To The Stock Exchange - Part 2
The Stock Market For Beginners: 7 Starter Tips
How To Start Investing On The Stock Exchange
The Suitability Of Stock Investments
6 Great Ways To Learn About The Stock Market
What Is The Stock Market?
Tell Us Your Thoughts About This Section