Multibagger stocks defined

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Everyone dreams of picking up a multibagger, don't they? The name is attributed, in the form of "tenbagger", to Peter Lynch, the author of One Up On Wall Street (which is an excellent read, by the way). If you keep at it for long enough, you'll probably snag at least one during your investing career -- and very possibly a good few more. But what are they, and where should you look for them?

Before I answer that, I'll offer a few words of caution. Over the 30 years of my investing career, people have asked me many times for tips for shares that will double, treble and more in a very short time. But I always tell them I don't know of any (if I did, I'd be retired now) and that all I can suggest is some that stand a good chance of doing it over the next 10 years or more.

So what is it?

What is a multibagger? If a share price climbs by 200%, is that a 2-bagger? Is a 500% gain a 5-bagger?

Actually, no, that's not what investors usually mean. What you need to do with a share that has gone up is divide the current price by the original price, and that's how many "bags" you've got. So if a share has risen from 100p to 200p, dividing it gives you 2, and you've got yourself a 2-bagger -- it's gained 100%, it's 2-bagged.

And it works like that all the way up. If a share price has trebled, it's a 3-bagger and it's gained 200%. Likewise, a gain of 900% (for example, from £1 to £10) is a 10-bagger and a 1,000% gain gives you an 11-bagger -- and a 10,000% gain is a 101-bagger, not a 100-bagger.

The harder question

Now to the difficult bit -- how do you find a multibagger for yourself?

If you ask investors who bought into mining explorer SolGold a year ago and are now sitting on a very nice 11-bagger, or oil & gas exploration firm Sound Energy which has 5-bagged over 12 months, you'll probably find two things.

Firstly, they'll most likely be speculative investors who really can handle a bit of risk, and wouldn't have turned into gibbering wrecks if they'd lost their stake. And as a consequence of that risk, they'll most likely be diversified with their fingers in a lot of investment pies to minimise the damage done by one going bad.

So for every enviable short-term multibagger you see, there's likely to be a lot of lwho have fallen by the wayside. Is this a strategy that's likely to win in the long term? For most people, no.

Or perhaps not so tricky

So what if, instead of looking for get-rich-quick punts, you put your money into big solid companies with proven track records? Think that will rule out your chances of finding multibaggers?

Well, if you'd bought shares in ARM Holdings in August 2006 and kept them until the chip designer was taken over by Japan's SoftBank a decade later, you'd have seen your share valuation soar from around 120p to 1,700p -- and that's a 14-bagger!

And you really don't need a high-tech growth stock to do it either -- even shares in plodding old Unilever have 13-bagged since 1988.

And that leads me to the really key factor that separates the successful multibagger investors from the wannabes -- time.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.