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FEATURE: It's the holy grail of investment – if you buy a share at 100p and it goes up to £11, you've got yourself a 10-bagger
May 20, 2010

Investors share a common goal; buy low, sell high and make a good profit. But what gets the heart really racing is that realisation that you're on to something big: a share that doubles, triples or, better still, becomes a mighty 10-bagger.

For the uninitiated, 10-baggers are shares that make you 10 times your money. So let's assume you buy a share at 100p. Up it goes, all the way to £11. That's a 10-bagger. The term is another of those sporting cliches that has found its way into City-speak via Wall Street thanks to its origins in America's national pastime: baseball (it refers to going round the 'bags', or bases as we might say, implying a home run).

10-bagger Lynch

The term was popularised within the investment community by former fund manager Peter Lynch, or 10-bagger Lynch as he became known in financial circles, due to his astonishing success running Fidelity's Magellan Fund between 1978 and 1990. The fund started out with assets of about $20m but ended up, 12 or so years later, worth $14bn thanks to his ability to spot 10-bagger after 10-bagger.

Cynics might argue that such success is only possible for fund managers with their reams of financial data, and army of analysts to process it all. But spotting these potential shooting stars in the first place is not necessarily an investor's biggest problem, it is rather the twin threats of short-termism and simple human nature. In most cases, it will take several years for a growth story to develop sufficiently to unlock the full share price profits potential. That takes a lot of patience on the part of the investor, and an iron will to avoid selling too early.

Changing habits

Luke Johnson, chairman of Channel 4 until quite recently, has enjoyed his fair share of 10-bagger success over the years, most famously as one of the original investors in the Pizza Express chain. Back in the 1960s, when the chain was established, eating out in restaurants was a rarity for all but a handful of people. But shorter working hours and better pay have turned what was once an occasional luxury into something that many of us do so often these days that we take it for granted.

The key for Pizza Express was establishing a clear brand to meet this change in habits, often becoming the one upmarket eatery in market towns up and down the country. But it still took years to develop into the 500-odd-strong chain it is today and create vast profit multiples for Mr Johnson and his chums.

Sell-by date

And not every investor can hang on in there long enough. For example, just think back to the last time one of your shares doubled in value. How tempting was it to sell up and lock in that fabulous 100 per cent profit? This is the human nature part of the problem. Clearly, if a share is to blaze its way to 10-bagger territory it will offer many profitable opportunities to sell, perhaps when it doubles. Obviously, locking in a profit is never a bad thing, but it can be frustrating to find you've sold too early instead of backing your original enthusiasm, and this temptation needs to be overcome to bag those really big profits.

The other issue is one of horizon. Many investors are only prepared to look as far as they can see, and that usually means anything from a few months to perhaps 18. In share price terms, it is usually about as far forward as most forecasts can offer sensible guidance. You'll seldom see a hedge fund, which trades its stakes every few months, milk a 10-fold share price increase.

Where to start?

So where will we unearth tomorrow's 10-baggers? Recovery stories are always an interesting area, and stock ideas regularly stem from the holdings of UK special situations funds, which you can find on trust

net.com. The junior Alternative Investment Market (Aim) is another obvious hunting ground. Aim's easier listing rules does mean there is a lot of over-hyped, speculative froth. But it has also developed into a genuine market where you can find small, young and exciting growth stories, the type that could set the world on fire in future.

"Elephants don't gallop," Peter Lynch famously said, implying that big companies don't have big stock moves – the biggest moves will inevitably come from smaller companies. In other words, be realistic. You are far more likely to see a company worth £10m today become worth £100m tomorrow, than you are to find a £1bn firm becoming a £10bn one.

Similarly, 10-bagger potential is likely to be found within certain sectors. Aim is awash with small oil and gas exploration companies and mini mining firms thanks to the soaring price of oil, gold and other hard commodities over the past few years. UK biotech offers similar dynamics to the resources sectors in that one new wonder drug can transform a stock market minnow virtually overnight in much the same way that an oil strike or new gold seam discovery can.

The next blockbuster is just around the corner, you just have to look out for the signs – a niche but valuable product, a genuine growth market or a recovery about to kick-start. Tomorrow's 10-baggers have already started their journey, you just have to hitch the right ride.