How to make big money in the markets?
How to make big money in the markets?
If you see the stock market drop by 50% and you feel a sense of happiness instead of panic — you’re going to be rich someday ~ Baba Siddhartha
You can be an industry veteran. Or extremely intelligent. Or read a ton of books on investing. Spend hours researching about stocks. But if you don’t have this fundamental quality — its going to be extremely improbable for you to grow your wealth in the stock markets.
The quality I am talking about is…
Patience.
It is LITERALLY the key to success in the markets [and in life]. When you stumble upon stocks that have delivered 10,000% returns — its not a linear journey. It is a rollercoaster ride. Those stocks would have fallen drastically in that journey of becoming a multibagger — an ebb & flow of highs and lows — and a lot of early investors would have sold off their holdings unable to truly unlock the value of their investments.
Let’s look at some examples to show you what I am talking about.
#1 Eicher Motors
When I think of multi-baggers in the last two decades, one name instantly comes to my mind. Eicher Motors — owner of the iconic Royal Enfield bikes. It dominates the mid size motorcycle market with a 90% market share.
Let’s say you bought the stock on 29 August 2003 at INR 17.02/share. If you had the nerves [and the balls] to hold onto the stock upto today, you would have multiplied your money by 200X, which means a 50K investment in 2003 would be equal to INR 1 CRORE today.
Now this looks easy in theory. Research about a company with a lot of future potential. Buy the stock and hold it for 20 years, sounds like a cake walk eh? But here’s why it would’ve been REALLY difficult:
On 24 April 2009 — the stock price was INR 19.91 post the aftershocks of the global financial crises. Your absolute returns on Eicher Motors would be just 17% in almost 6 years. Infact, you would have made more money if you had kept it in your savings account. Your faith would’ve been severely tested.
On 07 August 2009 — the stock price was INR 40.89. At this price, your absolute returns would be 140%, practically giving you a 2.4X ROI. You’d be tempted to sell your entire holdings and book the profits not knowing how the future looks like. A lot of people would have done that. Let’s assume you completely forgot about this investment and didn’t really do anything.
On 10 February 2012 — you suddenly remembered you had bought a few stocks back in the day and checked your DEMAT account. What you saw blew you away — your investment in Eicher Motors was up 940% delivering a >10X ROI. Your 50K was worth more than 5L. You probably would have sold the stock and bought a Royal Enfield [or a Harley?] with that money.
Very few people would have held onto the stock for 20 years. A lot of investors would have actually started investing in Eicher in late 2014/early 2015 when the stock was beginning to rise and caught the attention of mainstream media. Once a stock gets popular and lots of people find out about it — the probability to make exponential returns reduces exponentially.
I know, I am good at wordplay ;)
Opportunity Cost [selling entire holdings on 10 February 2012]: 95 LAKHS
#2 Jyoti Resins and Adhesives
I’ll be honest with you, I had never heard of this stock in my life prior to researching for this article — but the stock was popping up in most of the articles I read about multi-baggers. So, I thought why not let it make its way into this blogpost.
What a beautiful chart, what an exponential curve — these are the curves that value investors fall in love with! Keeping the dates similar to our earlier example, let’s say you invested 50K in Jyoti Resins on 22nd August 2003 when the stock was trading at INR 0.38/share. Would’ve been a penny stock back then, so committing 50K itself would’ve been a BIG ask — but let’s assume that you’re not afraid to make disproportionate bets.
If you would’ve held onto the stock for 20 years, your initial investment of 50K would be worth 19.23 CRORES. Yes, I did the math twice. You would be sitting on a profit of 19+ crore.
Now, this looks really good on paper. And people write articles about such stocks, explaining how stock market is one of the best places to get rich, painting a rosy picture in the minds of amateur investors. The reality is very different. I don’t think anyone would’ve held this stock for 20 years. The only person who would’ve made the 19+ CRORE in profits would have been someone who bought the stock in 2003, and completely forgot about it.
Here’s why:
On 28 August 2009 — the stock price was INR 1.11/share. You’d make a return of around 192% on your investment in 6 years which would translate into a CAGR of 20%. Decent returns, market beating returns and no one would blame you if you trimmed your position a little bit.
On 29 August 2013 — the stock price was INR 3.18/share. By some miracle if you held onto the stock, you’d be sitting on a return of 864%. Entering the multibagger territory. Your 50K would be worth around 4 LAKHS and you’d be pretty happy to see that kind of green in your portfolio. A lot of people would have exited the stock at this price.
On 03 March 2017 — the stock price was INR 51.33/share. Now at this price, you’d be sitting on a profit of more than 67 LAKHS. It’s a big amount. You could’ve bought a house with this money. You could buy your dream car. Plan that trip to Switzerland you always wanted. Secure the future of your kids. It’s a 135X ROI and it would be a rarity if anyone didn’t book those profits and still held onto the stock.
Opportunity Cost [selling entire holdings on 03 March 2017]: 18.5 CRORE
#3 Unitech Limited
In 2007, Unitech was the largest listed real estate player in India. It was a market darling and a multibagger delivering supreme returns for its investors. And then everything came crashing down. Let’s look at the chart below.
Let’s say you invested INR 50K in Unitech on 14 August 2003 when the stock was trading at 0.42/share. Real estate was one of the highest growing sectors back then and Unitech gave you a direct bite into that growth. The 20 year journey of this stock is quite fascinating to say the least.
Here’s why:
The periods between 2005 to 2007 marked a period of expansion at Unitech and the stock price reflected that expansion. On 28 December 2007 — the stock was trading at INR 483.80 and your 50K would be worth around 5.7 CRORE! A 1150X ROI in just 4 years. A lot of investors would have sold off their investment at this price — however if you still held on, a rollercoaster ride awaited you.
In 2008, the global financial crises caused a slowdown in the real estate market. At the same time, the company’s promoters were involved in a 2G scam. By 5 December 2008 — the stock fell to INR 30.80 and your investment of 50K would be worth 36 LAKHS. You would have lost 5.4 crore of gains in less than a year. But even at that price, you would be sitting on a 73X ROI — not bad by any means. It would have been prudent to exit your entire investment and book profits once the news of the 2G scam broke out.
The stock made a swift recovery after the financial crises in 2009. On 02 October 2009 — the stock was trading at INR 105.5/share and your investment of 50K was now worth 1.2 CRORE. You couldn’t believe it. Should you book the profits? Or should you wait? Should you partially exit?
Whatever decision you took, the stock never touched INR 105 again. What followed was a period of steady decline in the health of the company and the stock price and today the stock is trading at INR 1.82/share.
Opportunity Cost [of not exiting the stock on 28 December 2007] : 5.7 CRORE
Conclusion: If you want to make BIG money in the stock markets, you need patience. And nerves of steel. You need to stay invested for long periods. Let your money compound. However, you need to continuously monitor your investments too. The health of the company and the industry in general. Because you can be wrong a lot of times in your analysis. Sometimes the money doesn’t compound and you lose your principle investment as well.
In the chart for Unitech, we know the best time to sell the stock would’ve been late 2007. But that’s looking in hindsight. In real life, you don’t know how the future is going to look like. You can study the stock and make a meaningful estimate, that’s it. But there’s no guarantee that it will pan out the way you thought it would.
What is the right time to sell? Now, that’s difficult to understand and requires a lot of knowledge of the industry and the company. I’ll not get into that in this article, but you see my point — in the pursuit of making big money in the markets, you can very well lose a LOT of money too.
But, it is worth a shot isn’t it?
[Note: The author is not a SEBI registered investment advisor and the contents of this article do NOT constitute investment advice. Always do your own research before you invest in a company]