When the market has been going up in the
recent past and many stocks hit their all time highs, its definitely time to be
cautious. As an investor said "The best of times always seed the worst of
times in the life of every investor. Life turns 360 degrees when you least
expect. Something every investor must remember as things seem to only get
better with every passing day". This can’t be truer than now. Companies
that are making profits are getting crazy valuations and investors are in a
hurry to buy at any premium even while many of them were languishing at lower
prices only a few years ago.
Ace investors who believe in
making multiples of returns, know this is not a buyers’ market and prefer to
look at businesses which are out of favour, making losses but have prospects of
turning around. Some believe that luck is imminent to finding multibagger
stocks. Still we can put some method to the madness.
First the stock must be quoting
at its lowest in its recent history, which could happen only when the business
or the sector is in negative momentum or sentiment like what the pharma and IT
sectors are today. Or if the company has huge debts and making losses but has strong
management which can make it turnaround in the future. If you are catching a
fancy stock chances are that it is already making highs and you might have
missed entering at a right value. I know of an investor who invests when
company is doing at its worst or near loss making and then he believes they
will turnaround because they have a capable, trust worthy management and a ‘spark
idea’ that will turn them turnaround. This forms the basis for long-term
high returns and multibaggers.
Joseph Mazur in his book explains the
difference between a coincidence (a meaningful conjunction of things without
any apparent cause) and a fluke (an improbable outcome the cause of which is
clear – such as a multibagger returns, where buying the stock is what makes the
win possible)
