Do you have it in you to own a 15 bagger stock?

All of us often get tempted by the multi-bagger returns which some of the stocks have given over in the stock markets.  Often, we get messages like

“If you had invested a few thousands in Infosys/Wipro/HDFC Bank years ago, you would be worth crores”

Recently we came across the following headline in a prominent website. You can read about it here.  “This small cap debt-free company has given 1000% returns in the past 10 years”.

The name of the company is GMM Pfaudler.

What does GMM Pfaudler do?

GMM Pfaudler is a global company, established in 1884 which provides glass lined (GL) steel equipment to specific firms. The India unit was set up in 1962 and Pfaudler USA has a 51% stake.

1500% returns in Ten Years

The share price of GMM Pfaudler in Nov 2009 was Rs 90 and today it trades at Rs 1450. This is an investment return of 32% per year over ten years.  Let’s trace their journey.

What was the Investor Journey?

Let us look at how the share price has moved from 2005 to 2019

(Source: Screener.in)

Three distinct phases stand out here

From 2005 to 2013 for an 8 year period the share price was stagnant!!Between April 05 and August 2013, the share price was Rs 65.  If an investor had put in money in 2009 (after four flat years), the price would have remained the same for the next four years also! How many of us would have held on for 8 years with no returns?

Jan 2014 to Jan 2015, the stock price quadrupled from 85 to 350. – How many of us would have resisted the urge to sell at this time?

Since Jan 15, the stock has moved up four times from 350 to 1400 with shrinking volumes and higher volatility (please note the frequent highs and lows). Should we hold on now?

Learnings for us as Investors

• Complexity in understanding a business – To be a successful investor we should be skilled in understanding businesses, their triggers, ability to judge the management quality etc. In 2009, the company itself was bearish about future prospects in their Annual report!
• Patience and Time in the Market – The stock price was stagnant for 8 years. The 15x run up has happened over four years. After we build conviction in a stock, we need to be patient
• Riding the momentum – Identifying a stock, building a conviction and after having waited patiently, it is also important to ride the momentum. The stock moved up 4 times in 2014.  Most investors would have sold at that time. But the stock has continued and moved up another 4 times from that peak!!
• Handsome returns can come from boring businesses also – You don’t have to be in cutting edge industries to make multi-bagger returns. Handsome returns have come from specialty companies in the last few years.  GMM Pfaudler was listed in BSE in 1963 and the stock is available for 54 years now!
• Second order thinking is essential for successful stock investing – In the 19^thcentury there was a rush to mine gold in California. However, one of the biggest beneficiaries was a textile firm – Levi Strauss. You can read about it here. Similarly, over the last decade the pharma has had a mixed journey. But suppliers like GMM Pfaudler have done very well
• Difficulty in predicting the future – The stock is now being rated positively by analysts, their P/E has expanded to 40 times earnings, management commentary is positive, while earnings growth lags stock price movement. Should we remain invested?

Our Summary View

The story of GMM Pfaudler shows the benefits and challenges of direct stock investing.

Direct stock Investing has low entry barriers.  However, making money is incredibly tough and requires lots of skill, persistence and huge dose of luck as well.

We have to go through terribly boring periods of inactivity in the stock price, sudden and rapid rise in share prices, mind-numbing falls in stock prices, negative external environment and much more to achieve these returns.

And for every GMM Pfaudler, there are several dozen examples where investors have lost their capital.

Retail investors who would not have the time and skills would be better off investing in baskets of quality stocks with high quality fund managers.