"Ten bagger" was a term investing legend and fund manager Peter Lynch coined in his book One Up on Wall Street. It refers to an investment that appreciates to 10 times its initial purchase price – the equivalent of a 1,100% return.
If you haven't read the book I can thoroughly recommend it.
Lynch was manager of the Fidelity Magellan Fund from 1977 to 1990. Over that period of time, the fund grew from US$18 million to $19 billion by the time he left, and produced an annual return of more than 29% on average.
Recently, one of the stocks I own became my first ten bagger – not a bad return in just two years.Back in November 2012, I purchased shares in a small diagnostic imaging company focused on Melbourne, Victoria. Capitol Health Ltd (ASX: CAJ) shares were trading at around 8.8 cents at the time. They are currently trading at 85 cents. Including dividends and shares received in dividend reinvestment plans (DRPs), my total return is more than 1,000%. By comparison, over the same period, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has climbed just over 30%, including dividends reinvested.
So what are some of the lessons we can take from this?
- Smaller companies have more potential to multi-bag than large cap stocks such as Woolworths Limited (ASX: WOW), Telstra Corporation Ltd (ASX: TLS) or CSL Limited (ASX: CSL).
- Getting in early can be important – but not essential. As an example, Ramsay Health Care Limited (ASX: RHC) shares were trading as low as 74 cents in 1999. Buying shares after they had risen to $5.70 in 2004 would still have seen investors score a ten bagger, with shares currently trading at $57.54.
- Ignore the market's ups and downs. It also means becoming somewhat of an outcast, holding on when everyone else is selling, and conquering your investing fears.
- Ignore the chartists, tea-leaf readers, technical analysts and other short-termist traders – their methods will likely never score you a ten-bagger.
I may be biased, but if you want help finding the next ten-bagger, The Motley Fool's subscription-based services and free website are your best bet.
