If social media is any indication of the typical small retail investor, financial freedom ranks highly as a goal. Reading various social media posts, however, and I can't help but wonder just how few will attain financial freedom.
Many posts on social media reference the desire to find the next '10 bagger' (a home run). In reality, however, the vast majority of small retail investors are unlikely to invest a meaningful amount in a potential '10 bagger'.
Suppose an 'average retail investor' scrapes together $10,000, for example, to invest in Company X. So it becomes a '10 bagger'. That is only $100,000.
There are certainly many retail investors where $10,000, or $100,000, is a rounding error. In most cases, however, the typical retail investor seeking the next '10 bagger' who regularly posts on X falls in the camp where $10,000 is a meaningful amount.
Furthermore, the 'average retail investor' who scrapes together $10,000 is apt to 'crystalize' some/all of the capital appreciation before it becomes a '10 bagger'.
As you may appreciate, striking a '10 bagger' makes for a great story. In reality? They are rare and finding several '10 baggers' is an even greater rarity for most small retail investors.
We also need to consider the universe of large cap and mega cap companies. The majority have low probability of achieving '10 bagger' status. What is the probability that a $200B market cap company will become a '10 bagger'? It may - one day - but to become a 10 bagger in a decade might be a stretch.
Personal observation suggests most small retail investors looking for potential '10 baggers' are venturing downmarket (micro-, small-, and mid-cap companies). A company's market cap is not necessarily indicative of how the company is likely to perform. Large cap and mega cap companies, however, are likely to have superior access to capital. They can often 'weather' challenging business conditions more easily than much smaller companies.
In my recent You Don't Need 10 Bagger Stocks To Create Financial Freedom, I put forth that having meaningful exposure to a few large cap companies that double, triple, or quadruple in value over a decade can do wonders in helping an investor attain financial freedom.
The short-term share price of companies such as Visa, Mastercard, S&P Global, and Moody's, for example, might be volatile. If your investment time horizon is lengthy and you invest in them at reasonable valuations, however, your risk is fairly low....much lower than investing in MOST micro-, small- and mid-cap companies.
My recent How To Think About Risk post includes a link to Howard Marks' - co-founder and co-chairman of Oaktree Capital Management (the largest investor in distressed securities worldwide) - explanation about the character of risk, the relationship between risk and return, the misconceptions about risk, and how to think about risk.
More seekers of potential '10 baggers' would benefit from learning from Marks!
Recently, I stumbled upon Mark Sellers (portfolio manager at Sellers Capital Investors) Communication To Sellers Capital Investors - June 9 2007. Sellers draws a clear distinction between risk and volatility and states that volatility is not a risk unless an investor has a short time horizon. When an investor's time horizon is lengthy, an investor can withstand volatility. Naturally, it is important that an investor's downside valuation assessment is reasonably accurate.
NOTE: It appears Mark Sellers quit the hedge fund business in ~2009. In a letter to his investors, Sellers stated:
I truly love the art of investing, but managing people's money has taken a large toll on my demeanor and psyche. I feel downright miserable.
In Mark Sellers June 9 2007 communication, reference is made to the Kelly Criterion described in William Poundstone's Fortune's Formula The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street; a pdf version of this book is accessible in the Books section of this site. This criterion essentially states that equity investing (and other forms of investing) has as much to do with minimizing the probability of loss than it does with trying to make as much money as possible with each and every stock pick.
Speaking of investing for the long-term, investors should consider a holding period of at least 5 years. A holding period expressed in terms of anything less than this is not long-term.
If you listen to senior management of well managed companies, they talk about how investment decisions made in the short-term will impact the business over the long-term. Investors would be wise to think much the same way.
I recently listened to West Pharmaceutical's (WST) CEO and CFO present on September 18, 2024 at Bank of America's Global Healthcare Conference. The company's less than stellar performance in the short term can not be ignored. They, however, stressed that the current CAPEX initiatives are being made to accommodate growth - growth that is expected following extensive discussions with clients about their respective growth plans.
The timing of these major CAPEX initiatives, unfortunately, coincides with customers de-stocking from their elevated inventory levels that were brought about by COVID. Given this, WST's recent quarterly results have led to the company having fallen out of favor with some investors.
Looking at WST's share price behavior over the past few quarters, we see considerable share price volatility. This volatility is immaterial if you have a long term investment time horizon. If your investment time horizon is short, however, it is possible you may be unable to avoid permanent capital impairment.
Final Thoughts
The most important quality for an investor is temperament, not intellect. - Warren Buffett
It is important to understand yourself to avoid permanent capital impairment. Seeking potential '10 baggers' might be exciting. Save the excitement, however, for other aspects of your life. Smaller 'baggers' can lead to financial freedom.
Humans are, by nature, irrational. We are often tempted to trade if we perceive the market to be working against us. In contrast, well-tempered investors do not watch the market nor do they fixate on macro events. The ability to remain well-tempered helps us avoid permanent capital impairment.
Share prices fluctuate and some are more volatile than others. Understand the difference between volatility and risk so you can be more disciplined with how you react toward the irrationality of Mr. Market. The short-term direction of stock prices is close to random and thus it is important to remember that time in the market beats market timing every time.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long WST.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation. I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
