MULTIBAGGER
The Psychology of a Multibagger
By Carrie Crockett April 20, 2006 Comments
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You're a growth investor. You want to track down the very best growth stocks in a market that includes value stocks, small caps, dividend-payers, blue chips, penny stocks, etc. You must:
Isolate what makes a growth stock a growth stock.
Determine which stocks fit that description.
Hand-pick those most likely to become multibaggers.
Psych profiles in the stock market?
We call the greatest growth stocks "Rule Breakers" here at The Motley Fool. When psychologically profiled, what traits do we find in a Rule Breaking company?
The Myers-Briggs test is a common model of profiling, using the following dichotomies to distinguish personalities:
Introversion vs. extroversion.
Sensing (empirical processing) vs. intuition.
Thinking vs. feeling as a basis for action.
Judging (an orientation to rules and order) vs. perceiving (a tendency toward flexibility and affinity with change).
Would I recognize a multibagger on the Street if I saw one?
When it comes to Rule Breakers, the first dichotomy of the test isn't all that useful. You see, Rule Breakers can be total introverts, highly focused on their research into groundbreaking technologies. Conversely, they can be out there in the trenches, changing the world in a more hands-on way. Consider how eBay (Nasdaq: EBAY) turned a stale, mostly local personal-classifieds market into the world's largest online auction party, connecting buyers and sellers around the globe.
The next two categories can be collapsed into one more general trait: reliance on logic versus gut reaction. While Rule Breaking companies can be very logical in developing their products or services and running their finances, the overall impression one gets in a Rule Breaker's presence is one of inspired intuition -- the undeniable feeling that the company's technology or product can change the world.
Dreamer or entrepreneur?
In other words, Rule Breakers rely fairly heavily on faith in their visionary product or service. They are the idealists of the stock market. And as we all know, idealists include both (1) dreamers whose grand ideas fizzle out in a sad puddle of failure, and (2) entrepreneurs whose ideas change people's lives.
Mark Vadon, CEO and co-founder of Blue Nile (Nasdaq: NILE), fits into the latter category. The groundbreaking Internet jewelry merchant makes choosing engagement rings and other jewelry a far less stressful and complicated process, all from the comfort of your own home. Its certified products carry price tags that are often significantly lower than baubles bought at brick-and-mortar jewelers. Blue Nile also offers next-day delivery and a 30-day refund policy to appease customers concerned about buying jewelry online, sight unseen.
The fourth category (rule-oriented versus flexible) is perhaps the one that best distinguishes a Rule Breaker from other kinds of stocks. Rule Breakers, by definition, break rules. They're the outlaws of the Street. They like to bring about dynamic change, tend to be up-and-comers with plenty of room to grow, and possess the structural corporate flexibility to do so with panache. And if they're successful and well-managed, they can grow and adapt with an almost alarming, catlike stealth, making their investors very rich.
Now that you have a sense of what makes a Rule Breaker a Rule Breaker, let's see how David Gardner, Fool co-founder and lead analyst of the Motley Fool Rule Breakers newsletter service, goes about stalking multibaggers. How does David separate the next eBay from the next Kozmo.com?
These rules were NOT made to be broken
A successful Rule Breaking company should:
1. Be a "top dog" ...
2. In an important, emerging field, and ...
3. Demonstrate a sustainable advantage gained through business momentum, patent protection, visionary leadership, or inept competitors.
Being No. 1 in the Zoo-Doo industry doesn't quite cut it, for instance. Think more along the lines of the emerging satellite radio phenomenon. XMSatellite Radio (Nasdaq: XMSR) and Sirius Satellite Radio (Nasdaq: SIRI) are a duopoly. They have no real competition, and their subscriber bases are growing. Today, the companies boast more than 6.5 million and 4 million subscribers, respectively, compared with just 3.2 million and 1.1 million a year ago. That's the definition of an emerging field. XM's website sums the point up nicely: "One big idea can change everything."
4. Have visionary management and smart backing.
The leadership of Jeffrey Katzenberg, the former Disney executive behind hits like The Lion King, atDreamWorks Animation (NYSE: DWA) is the perfect example of a manager who knows the business he's in. Even more impressive, the DreamWorks board includes fellow company founders Steven Spielberg and David Geffen, former Microsoft executive Paul Allen, eBay CEO Meg Whitman, and Starbucks (Nasdaq: SBUX) founder Howard Schultz.
5. Possess a strong consumer brand.
Speaking of Starbucks, even when it started out, the coffee purveyor stood out from its competition with its green mermaid logo and gourmet brews. Today, that unique look is immediately recognizable on street corners from Chicago to Shanghai.
The textbook Rule Breaker
If you find these traits together, you may have a textbook Rule Breaker on your hands. If so, the potential financial gains are mind-boggling. Witness the nearly 70-fold share-price increase of Amgen (Nasdaq: AMGN) over the past 16 years. In early 1990, this small biotech was trading for about $1 per split-adjusted share. Today, Amgen is among the world's largest biotechs, and its rich pipeline has earned investors obscene returns.
But remember: Whether Rule Breaker investing is right for you depends on your own psychological profile. If you're particularly risk-averse, this type of investing might not be your cup of tea, except in tiny doses. And as always, a healthy portfolio includes a little bit of everything. Be sure to leave room for dividend-payers, value stocks, growth stocks, small caps, and blue chips.
But if you think you're the Rule Breaking type who'd be interested in learning more about industry-changing growth stocks in emerging fields -- companies with great management teams and strong vision, like Rule Breakers picks Blue Nile and XM Satellite Radio -- try a 30-day free guest pass. You'll gain access to David Gardner's scorecard of stocks, which is beating the market by nearly 24 percentage points on average. The new six-month review issue was released yesterday, and it'll give you guidance on every previous recommendation, including the best Rule Breakers for new money now.
Quite a few references to CVI above IMO
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