Do You Have the Stomach for a 10-Bagger? If So, Here’s How I Did It!
A term coined by Peter Lynch, a legendary fund manager, “tenbaggers” are investments that appreciate to 10 times their initial purchase prices. Usually, they represent stocks with incredible growth potential, but also a lot of risk. Not everyone has the stomach to strive for a tenbagger but, if you do, here are some insights into what to look for and my story of how I landed one. So here we go, here’s how to get a 10-bagger.
Characteristics of Multibagger Stocks
If you want to find a stock with the potential to become a tenbagger, you need to focus on potential. For example, a smaller company that is preparing to release a novel, emerging technology or new product may experience explosive growth, or a societal trend may lead a once stagnant space to reach new heights.
In some cases, upcoming government actions, like new laws and regulations, can impact a stock greatly. Similarly, sudden investor interest could drive a stock’s price up, even if the company itself is largely unchanged.
Surprisingly, even a financial hardship at a business can create the opportunity for a tenbagger. That was my experience.
I invested in 1,000 shares of Sirius XM stock in 2008. At the time, the satellite radio company was emerging from bankruptcy, so each share was only $0.35. However, Liberty Media Interactive gave them an infusion of capital at a critical moment. This made Sirius XM more financially viable, and other investors took notice, pushing the value of the stock up, eventually hitting $3.50.
However, that doesn’t mean it was an easy ride.
Having the Stomach for a 10-Bagger
Every stock comes with a level of risk. But, when you’re dealing with a potential tenbagger, the risk is typically pretty high. Often, whether the new product will be a success, whether the societal trend will hold, or whether the bad financial situation (such as the Sirius XM bankruptcy) will recover is unknown. Even if the stock has some gains, the chance for losses is also very real.
After acquiring my Sirius XM stock, I had to ride the subsequent rollercoaster. The company had some substantial debt hurdles, and there was no way to know for sure whether they would survive.
In fact, a lot of people were offering “advice” on the topic, saying that sticking with Sirius XM was a mistake. It takes a lot of fortitude to listen to your gut and ignore what others are stating about the company. Had I given in to their advice, I would have missed out on a tenbagger.
Outside pressure can make sticking with a stock harder, especially when the risk is high. If you want to try for a tenbagger, having a high tolerance for risk is a necessity. After all, if the investment was a sure thing, it likely wouldn’t have that level of growth potential. If you aren’t comfortable with the possibility of losses, going for a tenbagger isn’t for you.
Additionally, if you can’t ignore what other people are saying, you might not have the stomach for multibagger stocks. Every investment has nonbelievers and, when the risk is high, they tend to be very vocal. They sew the seeds of doubt and, if you can’t look past them, trying for a tenbagger may cause a level of stress you aren’t ready to manage.
Knowing Your Exit Strategy
You can mitigate some of the anxiety of trying to land a tenbagger by having a solid exit strategy. This involves selecting an upper and lower point where you will automatically sell, giving you some control over the risk.
For example, if you set up your account to sell as soon as a stock fall below a certain dollar amount, you can limit your losses should the investment fail to meet its initial potential. By setting an upper limit too, you can take your tenbagger profits and skedaddle, all without having to think about it.
I knew in advance that, once Sirius XM hit $3.50, that I was going to sell. At that point, it would be a tenbagger for me, and that was my goal.
Understanding Capital Gains vs. Regular Taxes
One point that is important to understand when it comes to selling stock is the tax implications. How long you hold onto an investment determines whether you are subject to the capital gains rate or your nominal rate.
If you hold a stock for less than a year, you pay taxes at your nominal tax rate. This is the rate you pay on all of your usual income, such as a salary from an employer, according to your tax bracket.
After a year, if you sell a stock, you pay at the capital gains rate. While your income also plays a role in your capital gains bracket, many (but not all) people will pay less in taxes when the capital gains rate is used instead of the nominal rate.
You should examine your unique situation to see which situation is financially favorable to you, as this may help you determine whether you should hold a stock or sell it. However, if your goal is to find a tenbagger and make an exit when it hits a specific value, you can’t control when that occurs. By understanding the tax implications, you can at least prepare for the impact of the sale and potentially take steps to manage your tax burden effectively.
Should You Try for a 10-Bagger?
Ultimately, only you can decide if you are comfortable with the level of risk that comes with trying for a tenbagger. While it is possible to see these kinds of gains, the chance for losses is substantial.
If you do decide you have the stomach for it, don’t invest more than you can afford to lose. This isn’t a place to dump all of your retirement savings or anything you need over the long-term. Instead, it’s about the potential for explosive growth and somewhat rapid gain, so keeping your investment smaller may be wise. Then, if the stock doesn’t pan out, you haven’t lost money you can’t live without.
Do you know how to get a 10-bagger? Tell us about your experience in the comments below.