SCOTT WELSH TRADING BLOG

Stalking The 100-Bagger

Stalking The 100-Bagger

Nov. 27, 2013

I’ve mentioned it before, but nothing used to get me more excited about trading than when Peter Lynch started talking about 10-baggers. The idea that I could go the mall, do a little research, and pick a stock that would increase 10-fold was so intoxicating. It fueled my trading for three years.

Peter Lynch is no longer investing now but the Gardner brothers (of Motley Fool fame) have adopted Lynch’s lingo and now spend their time chasing multiple-baggers. This, of course, means that they try to pick stocks for their followers that will double in value, (2-bagger), triple in value (3-bagger), or—dare I say it??—increase tenfold (the 10-bagger).

Yesterday, I came across an article on fool.com announcing that David Gardner just recently celebrated his first 100-bagger. A 100-bagger! That’s amazing! Then I got to thinking. What does that really mean? And is that possible for the regular, every-day trader?

First, let’s think about that 100-bagger. On September 9, 1997, David Gardner recommended that his readers buy Amazon (AMZN) for $3.19 (price adjusted for stock splits). As of today, November 27th, 2013, AMZN is trading at $385.47. Yep, that’s a 100-bagger all right!

But here’s the problem: to actually get that 100-bagger, Gardner’s recommendation in ’97 had to come with NO TARGET PRICE! To get that 100-bagger, you would have had to buy in 1997 and hold it blindly for 16 years all the way to today. You would have had to watch your AMZN purchase go up to 30-bagger status and then drop all the way down to a 2-bagger… and not do a damn thing! Who could do that? Furthermore, you would be sitting here today with a 100-bagger with no end in sight. When do you sell? When is it over? When do I get my money?

What’s more, how do you do that again? How do I find a 100-bagger starting tomorrow? David Gardner researched hundreds of companies to come up with a good one. And he looked for a small company (under $2 billion) with new technology, visionary leadership, a high sales rate, and a connection to the consumer. He looked for things that “could be really big”. Oh, okay. Wait, what does that even mean?  Could you sit down tomorrow and do that? I, myself, could not.

But even if you could find a good company, could you sit on a trade for 16 years and do nothing? And how would you bet? Would you bet your whole account? And what if you pick a bad one and it goes to $0? What do you do then?

In summary, the every-day trader would have to do a ton of research based on vague parameters to pick a stock that almost certainly won’t be a 100-bagger, and then hold that stock indefinitely with no stop loss or target. I respect the Motley Fool guys, but this just sounds like a pipe dream. The regular trader’s chance of finding a 100-bagger is a long shot. At best.

Maybe, however, there is another way.

I want a 100-bagger like everyone else, but there has to be rules, a clear roadmap to how to make it happen. I don’t want empty promises or vague recommendations. I want to know if it can be done, and if it can it be done clearly with a repeatable pattern.

Considering those questions, here’s what I did.

I took a chart that I have been trading live for several months, the USDJPY, and put it to work. I chose it because it trades pretty often and its profit to drawdown ratio is really high (we talked about that ratio in a previous post). I thought it made a good candidate, and it was the only chart I looked at for this REPORT.

Then I set up a few rules. First, I decided to start with a $10,000 account. I feel like that’s a reasonable amount of money for a regular trader to start with. Second, I didn’t want to work very hard for my 100-bagger, so I decided to only look at the USDJPY at the end of each trading week. Third, the maximum drawdown for the USDJPY when trading 1 full lot is $3,957. For some that might be too much, but the Garnders were willing to lose everything in their 100-bagger quest. I am only risking 39% of my portfolio in the worst-case scenario. I thought that was reasonable, considering we are in this for the long haul.

Then every time my account went up 10%, I raised my bet 10%. In other words, when my account went up $1,000, I increased my betting size by 0.1 lots. For example, my first bet with my $10,000 account was 1.0 lots. When my account reached $11,000 at the end of the week, then I raised the bet on my Robot to 1.1 lots. That was the extent of my work: to raise the bet at the end of the week if my account went up. Once I raised my bet, I never decreased it. That was just too much work. If I lost at the end of the week, I just left everything the same.

So how did it work out?

Using Tradestation’s weekly data, from the week of March 16th, 2003 through November 27th, 2013, my initial $10,000 account turned into a $567,950 account. That’s $557,950 of profit in 10 years and 8 months. And if you’re keeping score at home, that’s a 5,579-bagger (5,579% gain).  That pole-axes a 100-bagger in less time, with set rules, on a chart that needs no research to find. True, as you increase the betting there are some drawdowns along the way, but they are after you’ve already made a ton of profit.

As it turns out, a 100-bagger might not be possible. But a 5,578-bagger is.

 

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