Many investors were lucky to buy stock in Amazon.com early in its business cycle. However, few had the patience or the vision to hold through its difficult periods. Also, when the price of the stock fell from a high of $95 to a low of $7, several investors panicked and sold out. However, the few that held onto the stock have been rewarded with a 100-Bagger.
So, the question is: How do you find a 100-Bagger stock? Tom and David Gardner have broken down their experience of success into several important investing lessons. Lets’ take a look at a few of them:
(i) Look for a company with great potential and a visionary founder:
Investors must look ahead of the trend and identify companies with a great business, huge opportunity, a visionary founder, high sales growth and a relatively small market cap. Also, the company should have a consumer connection with you so that you know what the business is all about.
In hindsight, Amazon.com had all the makings of a mega-bagger. It had the early mover advantage in the then-fledgling e-commerce marketplace. E-commerce was destined to become a multi-billion dollar industry. Its founder Jeff Bezos was a visionary.
Other examples of such companies are Google, EBay and Apple, all of which had charismatic leaders with great drive and vision to take their companies to great heights.
(ii) Be business oriented and do not be influenced by stock prices:
“We are MBAs without a MBA” David Gardner says as he makes the great point that investors should always focus on the underlying business and not be swayed by stock prices.
“You must love the business and become a part owner and not just play the stock” he says with emphasis.
David gives the example of Netflix to prove his point. When Netflix announced that the DVD section would be transferred to Qwikster, consumers and investors did not like it and the stock price plunged from $300 to $55. However, if one had coolly analyzed the situation, you would have found that out of Netflix’s 24 Million subscribers, only a small fraction had left. The underlying business model had not changed as much to justify the steep fall in the stock price. Soon enough the stock went back to its previous level.
“So, look at the business and if you do not see any drama there, continue to hold the stock no matter what the market says” David Gardner advices.
Amazon itself was the victim of a severe price drop when the e-commerce mania suddenly dried up. The stock price fell from $95 to $7. A 30-Bagger had become a 2-Bagger because a lot of investors had dumped the stock. However, David Gardner continued to hold the stock because its business model was as robust as ever, only the sentiment had changed.
(iii) Have patience. It takes years to get a mega-bagger:
“Investors are so myopic that six months is long-term for them” Tom Gardner says with a wry smile as he reminds investors that it took Amazon 16 long years to become a 100-Bagger. “Don’t sell the stock in anticipation that the next quarterly earnings will be bad” he says. Investors must have the patience to hold onto stocks. It takes years for businesses to mature and for small caps to become mega caps, he emphasizes.
(iv) Don’t regret the losses that you suffer in your stock picks. Take a portfolio approach:
David Gardner makes it clear that he doesn’t have any special or magical powers while picking stocks. Instead, he makes the astonishing revelation that as many as 32 of his stock picks have lost more than 50% of their value. Also, there were several stocks that after becoming multibaggers lost all their value. However, that is no reason to churn the portfolio he says because the stocks that do make the grade will make up for all the losses. If you churn the portfolio by keeping a lookout for short-term trends, you will never get the mega-baggers in your portfolio, he adds.