Looking for Ten-Baggers is a Losing Strategy: You are not Peter Lynch

7 reasons why these 8 10-bagger picks have lost 42% in 3 years

"One of the most damaging concepts in investing has come out of one of the best books"

This is how I began my first ever investment article. I got a freelance spot on the Motley Fool UK in 2006 and, being a big-head, used it to attack one of the most popular ideas among small investors. I have listened with my head in my hands as friends have told me about their latest share buy, a 95% chance of failure punt wrapped in a great story.
Peter Lynch's idea, buying into a long-term growth company at an early stage, is a great one. There are 24,000 hits on Google for the phrase. How can such a good and popular idea be so damaging?

1. You are not Peter Lynch
2. Promoters of shares make them sound way better than they are
3. Journalists prefer exciting stories over solid but dull firms
4. Most journalists are writers, not investors
5. Survivorship bias and prominence bias conspire to make you think exceptional growth companies are commonplace
6. Misplaced faith in efficient markets - you are probably paying more than a fair price for the supposed next Coca-Cola
7. You may be diluted many times over in fundraisings - it's like a negative dividend

Eight potential ten-baggers from three years ago

I came back to this hobby horse because of a glitch on Investors Chronicle's website. They re-published an article from three years ago but gave it last Friday's date. Tomorrow's 10-baggers chooses eight shares that could ten-bag. The article is gone from the site but here's Google's cache of it. 

"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."

That sounds so straightforward. How have these potential portfolio-makers done?

Name	Ticker	Buy price	price now	change	Note
Firestone Diamonds	FDI	39.5	2.62	-93%
MDM Engineering	MDM	175	129.5	-26%
Falkland Oil & Gas	FOGL	177	26.62	-85%
Faroe Petroleum	FPM	107	110.25	3%
Monitise	MONI	20.25	35.38	75%
Ocean Power Technologies	OPT	432.5	#N/A	-69%	(only NASDAQ now)
SeaEnergy	SEA	38.25	22.25	-42%
Asterand	ATD	16.5	0	-100%
Average				-42%
FTSE Smallcap		2752.93	3907.39	42%

 

Not a single share has even two-bagged in three years. The best one, Monitise, is a very good company, in a great sector. Its turnover is up 1250% in three years. But it's losing more money than ever and fundraisings have nearly trebled the number of shares in issue

"Not a single share has even two-bagged in three years."

£1000 put into a portfolio of these shares would now be worth £520. £1000 in the closest index, the FTSE Smallcap, would be worth £1420 or 145% more.

[Edit] A comment here on this article points out that eight shares over three years does not prove anything. This is quite right. You'd need something like 100 over ten years to start getting a statistically significant result. It's a massive problem with learning to invest compared to say tennis, where the feedback is significant and immediate.

A Modest Proposal #1: Recapitalise UK with Good Gov't / Bad Gov't split

If it's good enough for banks it's good enough for Government

The Gov't has appointed Rothchild to advise on splitting problem bank RBS into a Good Bank and Bad Bank (report). The idea is to speed the recovery of the useful parts (mortgages, business lending etc) by shoving the toxic loans and some matching debt into a sack to rot and fester at the end of the garden.

Bondholders are concerned that they might have a haircut forced on them if they wake up on the wrong side of the sackcloth. It may seem unjust for the bonds, which rank ahead of preference shares, Gov't B shares and ordinary shares, to suffer a loss when the bank is solvent and whose equity still has a value of £30bn. Always remember that, when in a tight spot, the politicians' expediency card trumps all.

If bondholders in a solvent bank can be burned, why stop there? Britain is struggling to recover under a mountain of state debt, so let's split off the bits we don't want and draw a line under it (© Tony Blair).

Good Gov't / Bad Gov't split

Good Gov't	Bad Gov't
NHS Education Transport Culture, media & sport Communities & Local Government Justice etc	£1200bn debt Defence Home Office DEFRA PFI Unfunded liabilities etc

Holders of Gilts can take an immediate 25% hit and more later if we feel like it.The Good Gov't can move ahead with reviving the economy with plenty of spending on jobs, roads and health. Income tax can be cut to 15%, corporation tax to 12%, making it the lowest in the EU.

A disadvantage of the split is the need for two General Elections, one for each Gov't. Perhaps Gordon Brown and Tony Blair will come back to jointly run the Bad Gov't, tied together like bickering conjoined twins in an uncivil partnership.