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Don't listen to the hype around '10-bagger' stocks. You don't need them to create financial freedom.
What Is A 10-Bagger Stock?
A '10-bagger' is a company whose share price multiplies by a factor of 10x from your average cost. As you may well imagine, a very select few of companies globally (~2%) achieve this. Typically, a '10-bagger' is a profitable mid-cap company with very attractive growth potential that is attractively valued.
Information is so readily available to millions of investors that the probability of identifying potential '10-baggers' before other investors is not as easy as some suggest.
You also have to consider your temperament. Do you have the intestinal fortitude to hold your 'potential 10-bagger' through thick and thin?
Risk/Reward Trade-Off
In my September 13, 2024 How To Think About Risk post, Howard Marks co-founder and co-chairman of Oaktree Capital Management (the largest investor in distressed securities worldwide) explains the character of risk, the relationship between risk and return, the misconceptions about risk, and how to think about risk.
How many of us can properly assess the risk/reward aspects of an investment?
I see countless 'investors' on social media who focus exclusively on reward. Not a word about the risk being assumed.
Risk
The odds are stacked against a multi-billion dollar market cap company becoming a '10-bagger'. Investors, therefore, need to venture 'down-market' in the hope of identifying potential '10-baggers'.
If we were to compare the universe of mid-cap companies to that of the large-cap companies, I suspect the risk associated with most mid-cap companies would likely be higher. This is not to suggest that every mid-cap company is ALWAYS less risky than a large-cap company. Some large-cap companies are pure garbage.
We need to be realistic about our risk tolerance. Some investors state their risk tolerance is at a certain level when investment decisions are made when 'all is going great'. Not surprisingly, their risk tolerance changes dramatically when things 'turn ugly'.
BTW - this does not apply solely to equity investments. Stories abound about real estate investors in the Greater Toronto area (GTA) who invested in real estate in 2020 - 2022 and are now facing losses in the hundreds of thousands of dollars.
Reward
'Find a job you enjoy doing, and you will never have to work a day in your life.' - Mark Twain
I didn't want to find out if this were true or not. The VERY first day I started working full-time in 1980, and this is no word of a lie, I immediately set my sight on becoming financially free well before the 'typical' age of retirement.
Even though I enjoyed my career most of the time, my typical day at work does not compare favorably against my typical day during retirement.
In no way do I mean to disparage anyone who truly enjoys working and would gladly work as long as possible.
My reward was to be able to do what I want and when I want. This is not everyone's desire. How we choose to invest ultimately boils down to what reward(s) we seek.
Investment Sizing
If you are dead set on finding '10-baggers', investment sizing is worthwhile considering.
Suppose you invest $2000 in Company X hoping it becomes a '10-bagger'. Should your investment become a '10-bagger', is $20,000 going to make a meaningful difference in your efforts to achieve your objectives and goals?
If the answer is 'no', would a $100,000 investment in Company X that becomes a '10-bagger' make a meaningful difference? Would you have invested this amount in a 'potential 10-bagger'? For some investors, $100,000 is a rounding error. For others, $100,000 is akin to having won a lottery.
Next, and be honest, would you have exited some/all of this investment if it doubled, tripled, or quadrupled in value.
You Don't Need '10-Bagger' Stocks To Create Financial Freedom
I started investing through our retirement accounts in the 1980s - well before investing through taxable accounts. The likelihood of having '10-baggers', therefore, is higher within my retirement accounts (for which I do not disclose details) because time has been on my side.
While '10-baggers' are nice to have, they are not essential to create financial freedom; Visa (V), my largest holding, is my only '10-bagger' with an average cost of ~$23.
So what if you don't have a '10-bagger'? Have meaningful exposure to several companies that become '2 - 9 baggers'.
Mastercard (MA), Microsoft (MSFT), Automatic Data Processing (ADP), Church & Dwight (CHD), Walmart (WMT), and Broadridge Financial Solutions (BR) are a few examples of my holdings that have become 'multi-baggers'. They are not '10-baggers' but so what! None of these companies make me lose sleep. If I were to invest in much smaller companies in the hope of finding '10-baggers' I KNOW my stress level would not be what it is today.
Is there anything wrong with a company whose average annual total return is 12%? Applying the 'Rule of 72', your money doubles every 6 years (72/12%). Even if the average annual total return is 9%, your money doubles every 8 years. This is much higher than the rate of inflation.
What you need on your side is TIME! The sooner you start investing in high quality companies, the lesser the need to invest in 'higher risk' companies in an attempt to generate a rate of return so as to help you achieve your objectives and goals.
Next time someone tells you that you need '10-baggers' to create financial freedom....ignore them!
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 MA, MSFT, ADP, CHD, WMT, and BR.
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.
