How to find the next 10 bagger (Part IX)

In this series of articles, I am taking a look at the history of some of the ASX's best performing stocks. In particular, I hope to address the following questions.

1. What did these companies look like at the start of their rise?
2. Is it possible to identify tomorrow's 10 baggers?

So far I have written about eight companies that have delivered exceptional returns for shareholders in recent years. In part VI, I listed four observations of the six examples I had covered to that point. Here they are, updated for all eight companies.

1. All eight had market capitalisations of less than $100 million
2. In six out of eight cases, board members were buying shares on market
3. All eight companies were and still are scalable businesses with competitive advantages operating in growing markets
4. In six out of eight cases, headline profit figures from recent reports understated the company's ability to generate free cash

I could add other items to this list such as the tendency for the optimal buy point to be when market sentiment is very low, for example during the GFC or during sector specific depression. Also catalysts are present in some cases, for example Hansen Technologies Limited (ASX: HSN) benefited from overseas privatisation of utilities and Vita Group Limited (ASX: VTG) thrived after it started rolling out Telstra branded stores.

However, there are potential problems with drawing general rules from my observations. Here are some of them.

1. If the sample size is too small? See the law of large numbers
2. What if my observations are also widespread in badly performing stocks?
3. Correlation is not causation but mechanism helps and does it always matter? For example, a director buying shares on market does not cause a business to perform well, but there are obvious reasons to think that it is a decent indicator.
4. Some of my observations are qualitative and so are prone to bias. It may be tricky to apply them to future cases.

Despite these shortcomings, I believe there is plenty to be learned from the past. Whilst I am unable to show anything that stands up to statistical scrutiny from studying history, does that make it a fruitless exercise?