BS Number Wise: How common are ten-baggers in Indian markets?

Legendary fund manager Peter Lynch has said that his best bets have typically taken ‘three years to ten years or more’ to win big. He is the man who popularized the term ten-bagger, or a stock that grows to ten times its original value. An investment of Rs.10 lakh in such a stock would grow to Rs.1 crore.

As Indian stock markets hit all-time highs, Business Standard looked at how often such winners are to be found. The analysis shows that at least a dozen companies (or securities) grew to ten-bagger levels or more in every year of the last decade.

Data as of March-end was considered for the exercise. Prices could vary in between but this provides a broadly indicative sense of how commonly such securities can be found. The list contained over 8,000 names spanning over than twenty years. It included formerly listed companies and even some mutual fund units; essentially any financial security one could have bought on the stock exchange and watched grow to ten times or more of the buying price.  Some of the ten-baggers may have grown to even higher levels. A holding period of three years was considered, in line with Lynch’s assessment.

The highest number of ten-baggers to be realized in a given year pre-dates the global financial crisis. The financial year ending in 2005, 2006 and 2007 (FY05-07) saw hundreds of securities turning ten-baggers. There have been ten-baggers every year since, but not at the same scale. Interestingly, the creation of ten-baggers is closely linked to how well the benchmark S&P BSE Sensex has done as seen in chart 1 (click image for interactive link). Ten-baggers are realized as markets boom, though they are often bought during periods of decline. The highest number of ten-baggers was in FY06, but investors would have had to buy them in FY03 when the S&P Sensex had fallen 39 per cent.
 

While the absolute number of such winners seem high, the odds of finding one at random are slim.  Less than 2 per cent of securities in a given year have turned ten-baggers, on average over the last decade with a holding period of three years. The odds improve the longer you can hold on. There is a 14.6 per cent chance of getting a ten-bagger from a random pick if you are willing to hold for ten years (see chart 2).
 

The average investors chances of finding a ten-bagger may be affected by their behavior. The holding period for Indian investors is currently at its lowest in over a decade at 1.3 years (see chart 3). At its highest point, the holding period was 2.2 years. This coincides with a volatile period of decline for the markets during the 2013 taper tantrum. This was when the American central bank suggested that it would start cutting down on the large amounts of money it had been pumping into the financial system after the global financial crisis. Stock markets whose ascent had been supported by the flood of cash corrected sharply.
 

As speculation over another tapering gathers ground, investors may want to re-look not only at which stocks they hold, but for how long they hold them.