Multibaggers Defined

Multibaggers can lead you to a comfy retirement. Photo: Flickr user Chris Dodson.

If you don't know what multibaggers are, you need to learn now, because multibaggers are what you should be aiming for in your stock portfolio.

A multibagger is an investment that has gained several times its original value. Each "bag" represents your entire original investment. So if you invested $5,000 in a stock and your holding is now worth $10,000, you have a two-bagger. If it continues to appreciate and is eventually worth $35,000, it's a seven-bagger. At $50,000, of course, it's a 10-bagger.

The idea of a multibagger is thought to have started with Peter Lynch, who referred to "10-baggers" in his seminal investing book, One Up on Wall Street. The term stems from baseball, in which players rack up "bags" by running around the bases.

Funny math

Here's a bit of interesting math related to multibaggers -- check out the percentage gains that accompany multibagger investments:

That may all seem wacky, but think about it. If you have a $100 investment that grows by 100%, that means it tacks on another $100 in value, now totaling $200. So your 100% gain is a two-bagger because it doubled your money. If it has gone from $100 to $500, it has added $400 in value, or four times your original investment (400%), thereby quintupling your money -- making it a five-bagger. The percentages cited to describe an investment's growth generally only refer to the gain and exclude the original investment. But when you're talking about "baggers," you include the original investment.

Multibaggers start with the doubling of your original investment, giving you a two-bagger.

A word of caution

It's worth noting that while multibaggers are obviously desirable and worth aiming for, they shouldn't become your main focus. If you place the desire for enormous returns above your desire to find compelling, undervalued investments, your investments may not turn out as impressively as you hoped. Remember that high returns are often correlated with high risks. A lottery jackpot offers an enormous return for your dollar ticket, but only with the near-certainty that you won't win it. Similarly, chasing highflying stocks carries the risk that some of those rockets will crash back to Earth, perhaps even resulting in a total loss of your investment.

If you've developed a successful investing approach, stick with it, refining it over time as you learn more through reading and experience. Be sure to employ a lot of patience, too, and you'll probably accumulate some multibaggers.

On patience

Patience is more critical to investing success than you might think. After all, if you love the idea of achieving a 10-bagger, that means you should think twice about selling out of a stock once it doubles or triples for you. Sure, you should consider selling if your confidence in the company's future has diminished or if it seems overvalued. But if the company's long-term prospects are still solid and it's still performing well, then hanging on is usually the best thing to do.

A multibagger is a wonderful thing.

Finding multibaggers

It might seem difficult to find stocks that will become multibaggers for you, but it's not quite as hard as it seems -- and you needn't look only among highfliers to find them. Warren Buffett's Berkshire Hathaway, a conglomerate featuring a lot of insurance operations, is a great example, having exploded in value 167-fold over the past 30 years, making it a 167-bagger for some patient believers.

Many future multibaggers are right under your nose, and they don't always look like multibaggers. Netflix has been a volatile eight-bagger over the past five years, and Wal-Mart is a 10-bagger over the past 20 years, though it's only a two-bagger over the past decade. Starbuckshas been a four-bagger over the past five years and a 63-bagger over the past 20 years. See? Patience can pay off powerfully with the right stocks.

Here's to many multibaggers in your own portfolio in years to come!

The article Multibaggers Defined originally appeared on Fool.com.

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, ownsshares of Berkshire Hathaway, Netflix, and Starbucks. The Motley Fool recommends and owns shares of Berkshire Hathaway, Netflix, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.