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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19248  
Subject: Ten Bagger: two home-runs and a double Date: 10/11/2012 9:13 AM
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Murph's post is too important to leave it buried in an INTC thread:

Putting aside INTC for a moment, from my standpoint, I would have been a lot better off trying to hit more dividend growth investing "singles" than always trying for the fast grower "home runs". As the last words s in this post describing my current investing approach say:

...I might add, that had I taken this approach ( centered on good solid balance sheet dividend payers/growers ), when I was 25 ( versus starting this at age 57 ), my net worth would be many times what it is right now.

My advice to all but the most sophisticated of investors is simply to not swing for the fences so much...rather concentrate on hitting single after single...and you'll score a lot more runs. ;-)

Murph


http://boards.fool.com/if-you-are-a-small-investor-who-is-no...

There can be no doubt that ten baggers worked for Peter Lynch and that slow and steady worked for Buffett and other Graham-and-Doddsville investors. Every investor must find out what style best suits him, what he can make work. BTW, Lynch was not all ten baggers, he had a core of slow and steady and a long tail of potential ten baggers. He had so many stocks that it was said that there was no stock that Lynch didn't like. Part of his success came from breaking the mutual fund mold. Mr. Johnson told him to own just a few good stocks, advice that he conveniently ignored (and Mr. Johnson didn't fret about being ignored).

There is no need to take "ten baggers" literally. For one, Lynch never said ten fold in how many years. Ten fold in ten years is a CAGR of 25.9% and it drops off as time increases:

Years CAGR

10 25.9%
20 12.2%
30 8.0%

You can turn this around. If you have a string of investments producing 25.9% CAGR each, no matter in what time frame, you have a "synthetic" ten bagger! By the same token, if you fill your portfolio with a bunch of safe stocks producing a 4% dividend and no capital gains you will produce a 4% CAGR. It's simple maths, nothing else.

My own style has developed into the idea that each position must carry its own weight. With stocks the outcome is uncertain but with options the risk and the reward can be calculated. Say you are an average stock picker who just manages to match the averages. Instead of buying stocks directly, buy the same stocks via selling puts so that the net cost is 10% below the current price. Simple math says you should outperform the market because you are buying below market price. Of course, if the stock goes up above the strike price you won't get the stock, just the option premium. If that premium happens to have a CAGR of 25.9% you have effectively bought a "synthetic" ten bagger!

My point is that you don't have to exclude one method or the other, instead, you can combine them into a winning strategy like Peter Lynch did.

Denny Schlesinger
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Author: rjf53 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11963 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/11/2012 9:27 AM
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You can turn this around. If you have a string of investments producing 25.9% CAGR each, no matter in what time frame, you have a "synthetic" ten bagger!

In theory maybe, but the problem I have with this line of thinking is you never hear anyone apply the same logic to their losers.

Although Denny won't see this (ignore button) I have yet to see him apply his ideas on CAGR to a losing investment and have likely heard him apply it when discussing winners a hundred times.

So yes, a synthetic ten bagger is possible, but then a ten bagger loser is possible as well.

There is no free lunch.

B

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Author: rubberthinking Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11970 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/11/2012 1:08 PM
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There can be no doubt that ten baggers worked for Peter Lynch and that slow and steady worked for Buffett and other Graham-and-Doddsville investors. Every investor must find out what style best suits him, what he can make work.

very interesting.......what he can make work......

my dad hates this stuff, but has quite a few bucks.....god willing he and mom will be alive in the next twenty years putting them into their 90s......and in a time frame like that they would run out of money.....we had a good discussion or two about this and value stocks......currently they are mainly in cash......there are three market bottoms in a bear market generally speaking.....

I was looking at PBI about a year ago....suggested looking at it to my folks for the dividend.....I was shot down rather quickly because of risk.....you dont get a dividend that high without some risk.....

I looked at my trading profile....and realized just how impulsive I am.

and took that to heart......take out the impulsiveness and you have a value investor.......and that will work out well over time......

Dave

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Author: rubberthinking Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11971 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/11/2012 1:15 PM
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Although Denny won't see this (ignore button) I have yet to see him apply his ideas on CAGR to a losing investment and have likely heard him apply it when discussing winners a hundred times.


What is happening on the NPI board should never spill over here.

separate from that......BP might be a case in point.....if the bull market for commodity is done for the next ten to fifteen years then BP wont be going anywhere fast......it already is pretty much stalled....

http://stockcharts.com/freecharts/gallery.html?BP

XOM has been far more bullish....but that too could be shorted lived.....depending on how the commodities play out....

http://stockcharts.com/freecharts/gallery.html?s=xom

and of course the dollar is the story.....I am bullish the dollar...have been for a while now.....if it consolidates here and appreciates the markets will be in some trouble....both the commodities which seem currently highly correlated to the dollar and the equity markets which depend on a depreciated dollar......

http://stockcharts.com/freecharts/gallery.html?s=%24usd

Dave

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Author: BeatleMartian Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11973 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/11/2012 1:43 PM
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Lynch was not all ten baggers, he had a core of slow and steady and a long tail of potential ten baggers.

Forgive me if you will, but I've more or less referred to One Up and Beating and the Money Master profile for - don't know - maybe 20 years now, and built my investment philosophy, business, and day to day approach on those books so my opinions or comments tend to come off pretty strong. So that said, there is a direct reference that explains in Lynch's words how he created a portfolio:

One Up, Chapter 16, page 240, revised softcover

Some people ascribe my success to my having speacalized in growth stocks. But that's only partly accurate. I never put more than 30 to 40% of my fund's assets into growth stocks. The rest I spread out among the other categories described in this book. Normally I keep about 10 to 20% or so in stalwarts, another 10 to 20% or so in cyclicals, and the rest in turnarounds. Although I own 1400 stocks in all, half of my fund's assets are invested in 100 stocks, and 2/3rds in 200 stocks. One percent of my money is spread out among 500 secondary oportunities I'm monitoring periodically, with the possiblity of tuning in later. I'm constantly looking for values in all areas, and if I find more opportunties in turnarounds than in fast growth companies, then I'll end up owning a higher percentage of turnarounds. If something happens to one of my secondaries to bolster my confidence, then I'm promote it to a primary selection.

Granted, this isn't that much different than the point you are making but Lynch was far more than that. If it matters, and this was a while ago when growth rates were different, but Lynch says elsewhere that he rarely invested in the typical slow grower because slow EPS growth was rarely rewarded.

Course, when you read Lynch, you've also got to realize that anything he says is reflective of 1) the fact that he was Head of Research at Fido before he took over Magellan and 2) Lynch was essentially able to command all the resources of that organization. This made him uniquely qualified to be able to evaluate almost any opportunity that came across his desk, and indeed Lynch's category system defined in One Up (and expanded on in Beating thru company by company profiles) is set up to cover virtually any stock there is - assuming you as an investor get the category right and stay updated and have knowledge of the industry in question. Mere mortals like us have to pick and choose what works for us.

With stocks the outcome is uncertai...

This is more than an academic exercise but if you assign the category correctly getting the outcome - or possible outcome - right is a lot more straightforward. So...

...in all cases assuming a stock is appropriately valued and analyzed correctly, then...

*slow-growers are low risk, low gain
*stalwarts are low risk, moderate gain
*cyclicals are low risk and high gain or high risk or low gain depending on how adept you are at anticipating cycles
*fast growers and turnarounds are both high risk, high gain categories

As Lynch says, the key is knowledgeable buying.

I have found that the above is very helpful when looking at any position.

As to the original home run analogy, I agree that if one has success in one area and failure in another it makes a world of sense to stay in the successful segment. But that doesn't invalidate investing in any category whatsoever, assuming you know what you are doing.

Just 2c.

There is no need to take "ten baggers" literally.

right - Lynch even mentions this:

By successfully rotating in and out of several stalwarts for modest gains, you can get the same result as you would would a single big winner; six 30% moves compounded equals a 4 bagger plus, and six 25% moves compounded is nearly a fourbagger.

ccs says:
My point is that you don't have to exclude one method or the other, instead, you can combine them into a winning strategy like Peter Lynch did.


Exactly! And read the book, and read it more than once.

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Author: TMFHumbleServant Big gold star, 5000 posts CAPS All Star SN Explorer 1 Mission Team Member Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11974 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/11/2012 3:04 PM
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Thanks for the great reminder about Lynch's methods, BeatleMartian!

Fool on!

Dave

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Author: rjf53 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11975 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/11/2012 4:11 PM
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What is happening on the NPI board should never spill over here.

I couldn't agree more, although we may have a disagreement of what constitutes "spill over".

Beyond mentioning the ignore button I see nothing that could be characterized as spill over and nothing was intended to be some kind of shot in Denny's direction. (Seems kind of pointless if he isn't going to see it anyway)

The point I was trying to make remains. If you want to engage in a feel good exercise of imagining a synthetic ten bagger, then you owe it to yourself to remind yourself that this kind of logic allows for the possibility for a losing 10 bagger as well.

The old adage of a stock can't go below zero may be true, but losses on several sure can, in "synthetic" terms anyway.

B

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Author: BeatleMartian Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11976 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/11/2012 4:24 PM
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If you want to engage in a feel good exercise of imagining a synthetic ten bagger, then you owe it to yourself to remind yourself that this kind of logic allows for the possibility for a losing 10 bagger as well.

At least in stocks, I'm not sure what you mean. If I'm not shorting, I can't loose more than 100% but I can certainly make more than 100% in any single idea. Thus, the math is clearly with me. Besides, losing that much is really, really hard, don't you think? Everyone makes mistakes (more than my fair share here), but to have a terrific horrific permanent losses like that takes rare and unusual un-skill and ignorance. The words 'feel good exercise' is curious too - are you under the impression that it doesn't happen?

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Author: tamhas Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11977 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/11/2012 4:36 PM
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Actually, I think losing most or all isn't hard ... it just takes either not paying attention or hanging desperately on to hope. I know I have had a couple of cases where I held on far too long because I thought the story was still good and even then wasn't motivated to sell because it was no longer worth enough to do anything useful with ... so it went down even more.

Which said, I do tend to agree with you that zero is a floor unless one engages in buying on margin and the like.

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Author: BeatleMartian Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11978 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/11/2012 4:47 PM
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Actually, I think losing most or all isn't hard...

You are right. Sorry, what I meant was - doing that with an entire portfolio in total. Individual decisions can always go bad. I had a $6 to $1 trip myself this year in a turnaround that went into the toilet (oh, and just to twist the knife, I then had the joy of watching it go back to $3 in miraculous fashion AFTER my sale).

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Author: rjf53 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11980 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/11/2012 5:36 PM
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At least in stocks, I'm not sure what you mean. If I'm not shorting, I can't loose more than 100% but I can certainly make more than 100% in any single idea. Thus, the math is clearly with me. Besides, losing that much is really, really hard, don't you think?

Hello Mr Martian,

My point was regarding comments Denny made specifically...

You can turn this around. If you have a string of investments producing 25.9% CAGR each, no matter in what time frame, you have a "synthetic" ten bagger!

As you can see his "synthetic ten bagger" requires a "string of investments producing a CAGR of 25.9%"

So to turn your comment that "Besides, losing that much is really, really hard, don't you think?" around on you. Putting together a string of investments producing 25.9% CAGR is really, really hard don't you think?

My point was and is, that it is more of a mental trick i.e. 25.9% certainly looks a lot easier then a ten bagger. But when you combine that with the requirement that you need to but together "a string" of these investments then IMO what was presented as a simple example of math is in reality far from being simple.

My description of the a losing synthetic hedge was just a different way to illustrate my point. If you have a string of losers with a negative CAGR of 25.9 you will find yourself in the exact same spot as if you could in fact experience a ten bagger loss on a single stock.

The words 'feel good exercise' is curious too - are you under the impression that it doesn't happen?

My experience with stocks has been that anything can happen, which is precisely why whenever I come up with an idea/theory that feels good I go through the exercise of trying to shoot it down.

We used to call that "keeping it real" and that is all I attempted to do with my comments.

B

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Author: stillwater9999 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11981 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/11/2012 6:13 PM
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NPI Board?

sw

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Author: Hohum777 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11982 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/11/2012 7:20 PM
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NPI Board?

sw


New Paradigm Investing

http://boards.fool.com/new-paradigm-investing-114933.aspx

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Author: BeatleMartian Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11984 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/11/2012 8:28 PM
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We used to call that "keeping it real" and that is all I attempted to do with my comments.

got it - thanks...

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11985 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/11/2012 9:56 PM
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We used to call that "keeping it real" and that is all I attempted to do with my comments.

got it - thanks...


Skepticism can be very useful but it can be overdone. The Wright brothers' uncle reputedly said that if God wanted us to fly he would have given us wings. He said it in his sermon the Sunday of the week of the first flight at Kitty Hawk.

Denny Schlesinger

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Author: saunafool Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11986 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/12/2012 7:58 AM
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I would have been a lot better off trying to hit more dividend growth investing "singles" than always trying for the fast grower "home runs". As the last words s in this post describing my current investing approach say:

...I might add, that had I taken this approach ( centered on good solid balance sheet dividend payers/growers ), when I was 25 ( versus starting this at age 57 ), my net worth would be many times what it is right now.

My advice to all but the most sophisticated of investors is simply to not swing for the fences so much...rather concentrate on hitting single after single...and you'll score a lot more runs. ;-)


I agree with this wholeheartedly. My portfolio would have aslo been much better off seeking value and capital appreciation instead of home runs.

In all fairness to myself, when I started investing in 1998, that would have been a very unfashionable approach to take.

Anyway, one more thing about Mr. Lynch. He had 1400 stocks in his portfolio. Of course there were going to be big winners.

But, I believe the reason Mr. Lynch outperformed the market is for one simple reason that individual investors should take to heart. He let the winners run and often added to winning positions.

I haven't read his books in several years, but from what I remember he did not have a flat-out "stop loss" rule, and I remember him talking about buying more of some stocks after they were cut in half if his original premise still held true, but I think these were exceptions.

Those who have read and lived by his work, please chime in to clarify how you see his position on this.

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11987 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/12/2012 8:23 AM
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Those who have read and lived by his work, please chime in to clarify how you see his position on this.

As I recall, Lynch wrote down each stock's "story" on index cards and as long as the story didn't change there was no reason to sell. But if the story turned south or if he made a mistake then it was time to sell.

Denny Schlesinger

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Author: tamhas Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11988 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/12/2012 10:06 AM
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B., While I agree that achieving 26% CAGR is non-trivial, I don't think your negative 10 bagger exists because, when you get to zero, that's as far as you can go. Game over.

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Author: rjf53 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11989 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/12/2012 12:04 PM
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B., While I agree that achieving 26% CAGR is non-trivial, I don't think your negative 10 bagger exists because, when you get to zero, that's as far as you can go. Game over.

Man clearly I need to work on my communication skills.

Follow with me here. Let's assume you have a 100K portfolio and you normally like to take ten 10K positions. Let's further assume for now that nine positions are sitting in cash as we focus on the remaining 10K position.

So you are correct that on the surface that after roughly a string (4) negative 26% CAGR's you would find yourself at zero on the 10k we focused on; my question is where do you head next to fund your trades?

I have news for you, except for the issues of compounding or negative compounding. (If I can describe it as that) I can turn that 100K into zero through a string of bad 10K trades in the same number of trades it would take you to turn your 10K into 100K from a string of successes.

I'll quit now because if I haven't made my point by now I guess I never will. :<(

B

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Author: tamhas Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11990 of 19248
Subject: Re: Ten Bagger: two home-runs and a double Date: 10/12/2012 12:18 PM
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I can turn that 100K into zero through a string of bad 10K trades in the same number of trades it would take you to turn your 10K into 100K from a string of successes.

I think I understand what you are saying, but I still think the principle is there.

First, turning all 100K to zero takes some really spectacularly bad trading. It implies that not only does every investment go bankrupt, but that one blindly sits and lets it go that far without ever trading out. But, admittedly, by holding on it is certainly possible to turn $100K into $10K fairly quickly.

Second, I think your example is questionable because you are assuming that 90% of the portfolio is in cash, i.e., doing next to nothing. If that $90K is invested instead and grows even a little, it can offset the $10K loss thereby allowing one to keep investing $10K in stink bombs on a permanent basis! :)

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