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The Anatomy of a Multi Bagger



AakashMark Twain once said that history doesn’t repeat itself, but it often rhymes. On the same note, philosopher George Santayana is attributed to saying that those who do not study history are doomed to repeat it. These two statements are very relevant to investing. Markets for decades have followed similar patterns; the winners and losers of each market cycle broadly have similar characteristics.The basic human emotions of greed and fear have remained the same which causes these cycles/patterns to repeat themselves. However, markets do provide plenty of unique signposts along the way as we go through life, you just need to keep your eyes open and take an interest in what might lie ahead.

To understand what will work in investing over the next 10-15 years, it’s essential to understand what has worked so far. The “Anatomy of a Multi Bagger” largely remains the same. If one were to see the wealth generated by companies such as Page Industries, Titan, Pidilite, Asian Paints, Bajaj Finance, HDFC Bank, Kotak Mahindra Bank, Eicher Motors etc. over the last 10-15 years we notice some common traits – 1) Strong management, 2) Large runway for growth, 3) Prudent capital allocation strategy, 4) Excellent execution etc. to name a few. The moats for these businesses have grown stronger over time and the growth runway has allowed them to reinvest in the business at attractive rates and thereby compound capital.

Successful investing is often called a mix between science and art. Despite many attempts to find winning combinations of measurable factors that can be used to predict stock market winners, investment decisions often boil down to judgment calls that take qualitative factors into consideration.Each one of us is scouting for “outstanding” companies’ to invest in. Simply put, outstanding companies are companies with strong managements that have the ability to generate high returns on capital for very long periods of time, to do this they should be in industries that have a long runway for growth.Finding a company in an industry with high returns or avoiding a company in an industry with low returns is not enough. Finding a good business capable of sustaining high performance requires a thorough understanding of both industry and firm-specific circumstances. Sustainable value creation has two
dimensions—how much economic profit a company earns and how long it can earn excess returns .Let’s understand sustainable value creation better – First is the quantum of returns ie: the ROCE company generates in excess of its cost of capital, growth only creates value when a company is able to do this. Second part is how long the company can generate this excess return – this is probably the most important factor in long term wealth creation and is often not understood very well.In the long run, equity investors can only make as much money and return as the company itself makes. Hence, it pays to invest in companies with formidable Economic Moats, as this is the only way to ensure sustained superior profitability and wealth creation.

Warren Buffett, the chairman of Berkshire Hathaway, has emphasized over the years that he looks for businesses with sustainable competitive advantages. He suggests that buying a business is akin to buying a castle surrounded by a moat. Buffett wants the economic moat around the businesses to be deep and wide in order to fend off all competition. He goes a step further by noting that economic moats are almost never stable. Moats either get a little bit wider or a little bit narrower every day.

Competitive advantage comes in a variety of ways – cost advantages, network effects, intangibles like brands, regulatory advantages, switching costs and even things like the culture of a company. But having a competitive advantage is not enough. It must be an increasing competitive advantage. For huge returns, a large market opportunity is also necessary.

While determining potential winners its essential to use various mental models to determine what growth can be possible. Social Trends, Demographics, Product Innovation, Disruptive Technologies etc require the use of mental models as growth or de-growth in industries affected by these trends cannot be modeled in a spreadsheet ex: Growth of IT Industry in the last decade, Pharma post 2009, Domestic Consumption post 2011 and so on. Wealth creation in some of these Industries has been phenomenal where the leaders have gone on to deliver 35-40% CAGR returns over short time span of 5-6 yrs. (source: Bloomberg)


Using the above learning’s one can identify the best business to invest in but still end up with average or below average returns – Shocked ! Well, right valuations and market cycle play an important part in the wealth creation process. It’s essential to think through all possible factors and scenarios that could affect the underlying investment, as Warren Buffet once remarked “Investing is simple, not easy”.

Here is how Howard Marks of Oaktree Capital describes the thought process – The first-level thinker simply looks for the highest-quality company, the best product, the fastest earnings growth, or the lowest P/E ratio. He’s ignorant of the very existence of a second level at which to think, and of the need to pursue it. The second-level thinker goes through a much more complex process when thinking about buying an asset. He would ask questions such as what would cause the growth to fall, how technology will impact the business few years hence, how does irrational price behavior by new entrants with deep pockets impact profitability etc.

We use a confluence of factors to identify emerging trends that could be secular in nature and within these sectors which are the companies that are capturing a lion’s share of revenue/profit pool and growing rapidly. Assessing management quality and backing the best is paramount to investing success, over 90 percent weight could be given to this metric alone. This is the toughest part of the investing process and the most important – hence the “art”.

India’s potential for secular consumption boom at the current level of GDP/Capita is well understood. What has changed over the last 10 years specifically is consumption patterns in the top 4-5% of the population (by income strata) have started to emulate patterns in developed economies. Growth of Indian business in certain niche sectors such as staffing, security, packaged food, branded apparel, asset management, retail etc is quite similar to how many of these sectors evolved in the US during 1975 to 1995.

Understanding these emerging trends and co-relating them to how these sectors fared in developed markets will give you flavor of the opportunity size and market cap that can be created over the next 10-15 years

To conclude, 1) Find great companies, develop the conviction to hold them 2) When a company performs, and the story hasn’t changed, stop trying to change it, enjoy the ride.

To make money in stocks you must have the vision to see them, the courage to buy them and the patience to hold them. Patience is the rarest of the three.

– Thomas Phelps in 100 to 1 In The Stock Market