Please find below our key excerpts from a great blog published by Congruence Advisors on "Why chasing multi baggers has destroyed more wealth can created it". The central theme of the blog also revolves around the idea that having a quality portfolio actually increases your risk apatite to bet heavily when odd are in your favor. (Emphasis Ours)
None of my multi-bagger stocks started off looking like one, there has not been a single instance where I researched a business and could confidently say “This will make me 5X over the next 3 years”. What it usually starts with is a combination of underappreciated business quality, undervaluation and a respectable growth runway, there on the market takes it higher depending on a lot of factors.
5 out of 25 stock recommendations turning out to be three baggers does not necessarily improve the return profile of the overall portfolio, what if 8 of the remaining turn out to be duds which lose 70% of the invested capital?
The other variable that never gets its due is capital allocation. A multi-bagger stock with a 2% starting weight does not move the needle too much, while the same stock at a 10% starting weight can move the needle. It is very difficult to take a 10% bet on a single stock when the rest of the portfolio is comprised of similar unproven businesses.
By the time we went into the COVID-19 meltdown of March 2020, my portfolio had a healthy proportion of stocks that were relatively immune to the market meltdown. This enhanced my ability to take some interesting bets through the period of May to July 2020, a couple of them did turn in 100 %+ within no time; but that is not something I had planned for nor had anticipated. If not for the durability of the existing portfolio, I would not have been in a situation to take those bets. I would have been licking my wounds and staring at a 40% fall from the peak in under a month.
Investors look for above average growth coupled with longevity and predictability in their businesses, the ability of the underlying businesses to stay the course and to see out bad periods without taking too much damage is what keeps them in the long-term hunt.