Multibaggers, mirages and market math

It says the market will go up this week.

It does.

The following Monday, another letter arrives. This time, I say the market will fall.

It does.

Then it happens again. And again. Eight weeks in a row. Eight market calls. Each one perfect.By now, you would be tempted to conclude that I possess either rare market insight or divine intervention. You may even consider investing in my fund.You should not. At least, not merely on this basis.

I could have done this with no forecasting skill at all.

Here is how. I begin with one million people. To half of them, I send a letter saying the market will rise. To the other half, I say it will fall. At the end of the week, whichever group received the wrong prediction never hears from me again. The group that received the right prediction becomes my new universe. I split them again. Half get a bullish prediction, half get a bearish one.

After eight weeks, I am left with 7,812 people who have received eight perfect market calls in a row. You happen to be one of them.

While it looks like genius, it was only arithmetic.

That is survivorship bias. The outcome looks extraordinary because we only see the survivors. We do not see the much larger graveyard of failed predictions that made the miracle possible.

The same bias often creeps into how we think about equities.

All of us know someone who made serious money in a stock that went up 10x, 50x, perhaps even 100x. We see investors on television who built reputations by finding stocks that did not merely compound, but exploded. Over time, the lesson appears obvious: to generate decent portfolio returns, one must find the next multi-bagger.

It is a seductive belief. It is also an incomplete one.

To test it, we looked at stock price data since 2000. We divided the market into two broad buckets: the top 250 companies by market capitalization, which we classify as large and midcap, and the next 500 companies, which we classify as smallcaps. Going below the top 750 was not feasible in the early 2000s and remains difficult even today, given liquidity constraints.

For every monthly five-year window since 2000, we calculated the proportion of smallcap stocks that went up more than 5x over the following five years, or in other words, “5x in 5Y”.

We then looked backward. For each starting month, we calculated the proportion of stocks that had fallen more than 50% in the preceding five years. The question was simple: if a large part of the market has already been badly bruised, what is the subsequent probability of finding stocks that go up 5x?

The answer is intuitive, but important.

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In the early 2000s, Indian equity markets were still relatively nascent. Nearly half the listed small-cap universe went up 5x over five years. Put differently, finding a five-bagger then was almost as common as calling heads or tails correctly on a coin toss.

That period left a deep imprint on many investors. A number of today’s market veterans generated their first meaningful wealth during that phase. For them, the multi-bagger hunt was not mythology. It was lived experience.

The post-COVID period created a similar, though less extreme, imprint for a newer generation. Given that 81% of active demat accounts today have been opened only since COVID, many investors entered markets during a period when finding a 5x stock was as frequent as roughly one in three. For them too, the experience was real. But the extrapolation may not be.

Because outside these exceptional windows, the odds were far less generous.

The probability of finding multi-baggers rises dramatically when the starting point is depressed — when a high proportion of stocks have already corrected sharply in the previous cycle. In other words, multi-baggers are not merely born from brilliance. They are often born from a low base.

This is where survivorship bias becomes dangerous.

We remember the stock that went up 50x. We forget the conditions that made it possible. We remember the investor who found it. We forget the many who bought similar-looking names and did not survive the drawdown. We celebrate the winner, but ignore the starting universe.

The same applies at the portfolio level.

A stock going up 5x is exciting. But a portfolio is not one stock. To examine this, we ran a bootstrap simulation of random 30-stock portfolios across 100,000 runs. The results were revealing. The probability of building an entire portfolio that went up 5x between February 2020 and September 2024 was c.40%. That is strikingly high. But the probability of losing half the portfolio value by March 2026 was also 32%.

In other words, the same market structure that made spectacular gains possible also made brutal drawdowns probable.

That is the part often left out of the multi-bagger story.

Over the long term, the picture becomes even more sobering. The 10-year average rolling return of the BSE Large Cap Index is 12.1%. The corresponding number for the BSE Small Cap Index is 13.2%. Given that multi-baggers are largely found within small caps, this difference is not large enough to support the belief that merely hunting in the multi-bagger pond guarantees superior long-term outcomes.

The lesson is not that multi-baggers do not matter. They do. A few exceptional winners can transform outcomes. The lesson is that the probability of finding them is not constant. It changes with the cycle, the starting valuation, the prior drawdown, liquidity, flows and sentiment.

There are therefore two ways to approach the market.

The first is to keep hunting for the next big thing. It is exciting. It provides the thrill of discovery. It offers the possibility of finding that rare gem that makes the entire exercise worthwhile. But it also comes with sharp drawdowns, false starts, crowded trades, and many instances where the cup comes very close to the lip before slipping away.

For some investors, that is the cost of doing business.

Of course, every rule has exceptions. There will be investors who can tilt the odds meaningfully in their favor, through skill, process, temperament, or sometimes luck. They may produce outcomes far superior to any randomized simulation. But judging by auditable performance data across the industry, such investors are either in very slim company or are not managing public money.

The second approach is less glamorous, but perhaps more useful: know when the odds are in your favor.

There are times when looking for multi-baggers is a high-probability exercise. These are usually periods of deep pessimism, widespread drawdowns, poor liquidity, exhausted sellers and low expectations. There are other times when the multi-bagger hunt becomes less an investment process and more a narrative chase.

The difference matters.

Because in markets, stories sell better than statistics. But over time, statistics decide which stories survive.

( The author is Co-Founder & Director, Buoyant Capital)