Volatility Is Needed For A Multibagger

2/16/24, 9:26 AM Volatility Is Needed For A Multibagger _ Seeking Alpha
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by From Growth to Value
From Growth to Value

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Volatility Is Needed For A Multibagger

Jun. 22, 2021 7:56 PM ET | 32 Comments
Summary
For me, volatility is not risk and often volatility is necessary to have big gainers.
What is risk exactly? We look at the definition and apply it to the concept.
How you should react to volatility.
Chris Mayer identified 365 stocks that went up 100 times and more and all of them
had drops of more than 50%. We look at a few examples.
All future stock market crashes look like threats, but all past crashes look like
opportunities. Think ahead!
Hi Multis
For some of you, this article might be familiar, as it's an elaboration of the third article in
the Potential Multibagger series. But I wanted to split this off to put extra emphasis on
this and to be able to add it to the Getting Started section, as I think it's crucial to
understand if you want to be a successful investor in Potential Multibagger stocks for the
long term, at least 3 years and preferably longer. I also want to make the articles of the
picks a bit shorter and lighter.
This article will also be published on the public side of Seeking Alpha but of course, you
get it first.
Introduction
https://seekingalpha.com/mp/1308-potential-multibaggers/articles/5606932-volatility-is-needed-for-a-multibagger 1/15
High volatility is completely inherent to Potential Multibaggers. Don't let this put you off.
Huge spikes and big falls are a part of the journey if you look at stocks that can multiply
a few times over.
Volatility does not equal risk, no matter how hard pundits try to convince you of this. In
this article, I will explain how I see risk and how volatility is often necessary to have big
winners.
What is risk?
Wikipedia defines risk like this:
In simple terms, risk is the possibility of something bad happening. Risk involves
uncertainty about the effects/implications of an activity with respect to something that
humans value (such as health, well-being, wealth, property or the environment), often
focusing on negative, undesirable consequences. (...)
The understanding of risk, the methods of assessment and management, the

descriptions of risk and even the definitions of risk differ in different practice areas
(business, economics, environment, finance, information technology, health,
insurance, safety, security etc).
As you can see, the term itself is simple. It's the possibility of something bad happening.
If you look at the second paragraph, though, it's getting more complicated again and
several definitions of risk in several contexts exist.
For me, I use the simple, centuries-old definition of risk. For me, risk means how likely it
is that you will lose your money in your investment over a longer period of time, 3 years
or more.
That also means that for me, risk is not quantifiable. Quantifiability is why a lot of market
pundits choose to equal volatility and risks but I see this as the proverbial man with the
hammer who sees nails everywhere.
Volatility and how to react
As a long-term investor, you can develop a competitive advantage over almost all other
investors, especially if you invest in Potential Multibaggers. The edge you have is simple
but very hard: learn to sit on your hands through drops (or add more if your conviction is
high and your position not too big already). There have been several drops already
(March 2020, for example) and I have always tried to help as much as possible to keep
perspective with (daily) comments on chat and articles meant to support you. I wrote this
article, for example, about a week before the bottom of the coronavirus crash in March
2020: What To Do In A Market Crash?
Doing nothing is one of the main reasons why I have done so well since I Potential
Multibaggers with Shopify (SHOP) in May of 2017 at $77.86. In each and every year
since then, Shopify's stock was down 30% or more for a while. It's now at $1508 (at the
time of writing), up more than 19 times in value. The only time I did something, I made a
mistake, as I trimmed my position a year ago at $750. I added to it later again, at a
higher price. That's often the price of acting too much.
Volatility works both ways, up and down, although a lot of people only look at volatility
when a stock goes down. You need volatility to have outsized gainers and therefore I
see volatility just as something inherent to growth investing, not something negative.
To be a great long-term investor, you should train yourself to be unmoved by stock price
movements. After all, a volatile stock price doesn't mean a volatile business.
Being unmoved by stock price movements sounds easier than it is. When the stock price
drops, you hear all kinds of negative arguments about why that is. Some might even be
true but don't let it distract you from your long-term goal.
If you selected on quality, and that's what I always strive for, stocks that fall represent
opportunities, not threats. Say this out loud with me:
I have given this the layout of a quote, not because it is one (I made it myself) but
because it stands out like this, and I want you to really let that lesson sink in. So say it
out loud again. If your partner looks bewildered that you talk aloud, just say that you are
training to make money. He or she will understand and encourage you to repeat.
100 baggers
If you are a true long-term investor, you should be happy if a great stock drops, even
though I know that sounds counterintuitive for a lot of people. I'm pretty sure that a lot of
you feel stressed when their stock drops by double digits.
Of course, it never feels good to see your portfolio's worth shrink. I am human as well, of
course. You think about your hard-earned money and you see it becoming worth less
than before. Try to focus on what you can add to your portfolio, not on what's already in.
If you can't add for some reason, then you should realize that your chances of winning
haven't changed because of a drop. Your chances only go away at the moment that you
sell.
In his excellent book 100 Baggers, Christopher Mayer shows and writes about 365
stocks that have become 100 baggers (and more) between 1962 and 2014, all stocks
that turn $10,000 into $1M and more.
All of them have gone through really big drops, some of them several times. All of the
100 baggers, all 365 mentioned in the book, without one single exception, have
experienced a period in which the stock had plummeted 50% and moreover, the majority
dropped more than 75% on several occasions. So be prepared for big drops from time to
time and don't let it scare you out of your position.
Examples
We all know how well Amazon (AMZN) has done over the course of the last two
decades. If you had invested $10k at the IPO and held all the way through, you would
now have almost $18M. Even a $1,000 investment would have made you a millionaire!
Data by YCharts
Even if you only started investing in 2011, 10 years ago, your $10,000 would have grown
to almost $180K.
Data by YCharts
This is what you have to be able to endure: since its IPO, Amazon dropped between
10% to 19% 29 times, it dropped between 20% to 29% 14 times, it dropped between
30% to 39% 8 times, it dropped between 40% to 49% 5 times, it dropped more than 50%
4 times and more than 90% 1 time (in the dotcom crash). That 90% is extreme and rare
but you should realize that all the rest is perfectly normal to attain such life-changing
investments. If you don't pay attention to the fact that it's normal, you will sell, I can
guarantee you that.
Netflix (NFLX) is another example. If you would have bought at the IPO, this would have
been your result with $10K:
Data by YCharts
Netflix (NFLX) is another example. It has gone up 417 times in value since its IPO.
That's an average CAGR of 35% for 20 years. But it was not a smooth ride. This is from
August 2011 to September 2012:
Data by YCharts
Down 80%. But suppose you bought for $10K at the very top then, in August of 2011,
you would still have a great result today:
Data by YCharts
There were also several periods in which the stock didn't return anything for years. From
2004 to 2008, for example. Ok, there was a crash in 2008, but still. This is from May 1,
2011 to July 1, 2013, which serves as another example:
Data by YCharts
Let's take a Potential Multibagger, Square (SQ). This is its stock price graph from
September 2018 to June 2020:
Data by YCharts
And Square since June 2020:
Data by YCharts
This is how just how great growth stocks behave. Sometimes they jump ahead a bit,
sometimes they stand still for more than a year and then suddenly sprint back up. That's
the positive side of volatility in action. If you have sold the stock because it went down or
didn't move much, you miss a lot of the upside, of course.
If you are not patient enough and you don't have an investment horizon of at least 3
years, it could be a losing strategy to buy high-growth stocks. And because so many
people, the majority of investors, don't have the patience and feel the urge to do
something, it's a competitive advantage if you can zoom out and be patient.
There are a few common characteristics in all of the great stocks in history and high
volatility is one of them. You should know that and prepare yourself for that.
I'm sure if you say it out loud a third time, your partner, children and pets won't be as
shocked anymore, so here we go again:
Of course, a 50% drop if your stock is already a fivebagger will feel less painful but even
if you just started investing in a company of great quality and the stock drops by double
digits, you should be prepared to hold.
If you teach yourself to sit through volatility, that is your entrance ticket to really life-
changing outsized gains, your exam to pass the 'great investor' exam.
When the stock price is down significantly, you always hear explanations, which always
seem to make sense. A more recent Potential Multibagger example that is still playing
out? Teladoc (TDOC). This is its graph since early March 2020:
Data by YCharts
[object HTMLElement]
Don't look at the stock price too much

Too many investors look too much at the stock price, while the information is not there,
but in the quality of the management, the vision of the founder, the balance sheet, the
growth numbers, the products, the interaction with customers, the options that the
company has, etc. If you don't have that background, no access to that information
through articles here on Potential Multibaggers or any other channel, you will drop the
stock when the stock price drops.
The difficult thing is not just identifying stocks that have the potential to become
multibaggers but holding on to them for a very long time without losing your conviction or
patience. If you see a drop in the stock price as a huge risk, then it will be very difficult to
have outsized gains.
Conclusion
Doing nothing in the middle of calamity can be a competitive advantage. You need
volatility to have big gainers and if a drop scares you out of your position, you can miss
the positive side of volatility, a huge surge.
And how could we end this article better than with the most important thing to
remember?
In the meantime, keep growing!

Analyst's Disclosure: I am/we are long AMZN NFLX SHOP SQ TDOC.
I wrote this article myself, and it expresses my own opinions. I am not receiving
compensation for it. I have no business relationship with any company whose stock is
mentioned in this article.
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NFLX is in our 7-year-old daughter's portfolio US she watches it quiteDOWNLOAD
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2/16/24, 9:26 AM Volatility Is Needed For A Multibagger _ Seeking Alpha

Potential Multibaggers Launch chat

by From Growth to Value

From Growth to Value

How you should react to volatility.

The understanding of risk, the methods of assessment and management, the

Volatility and how to react

And Square since June 2020:

Don't look at the stock price too much

In the meantime, keep growing!

ACCOUNT STOCK ANALYSIS ANALYSIS BY MARKET OUTLOOK MARKET NEWS

Create Portfolio Long Ideas Energy Economy Trending News

Investing Groups FAQ

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