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Stop Looking For Ten-Baggers!

By Alun Morris
May 4, 2006

One of the most damaging concepts in investing has come out of one of the best books -- Peter Lynch's One Up On Wall Street. How can ten-bagging be a false guide star? It's because we are not Peter Lynch. He is one of the world's best business analysts. He isn't dazzled by great technology, in fact he loves grubby, boring and dull companies. However ten-bagging to most of us means hypersonic wing design, 100% compound growth and the forthcoming replacement for the wheel.

But wasn't it a one-foot investing putt to see that Microsoft (Nasdaq: MSFT) was going to be the biggest software company in the world? Well, yes. With hindsight.

For every Microsoft there's dozens of Icaruses. Icarus you will recall was first mover in a new personal transport technology which actually worked. However he didn't foresee an operational snag and the return was calamitous.

Dead certs

So what shares have looked like near dead certs to be ten-baggers? Companies with proven world-beating technology or perhaps ones with a consumer monopoly and a sure rollout programme? Here are three of the best-looking candidates for a tenfold gain in the last 6 years. They would have lost you 90%, 93% and 98%.

1. Patientline (LSE: PTL)

Price in 2002: 220p
Now: 23p

Patientline offered private hospital service to NHS patients -- a bedside telephone and TV. With mobiles being banned, 50p/min call charges and exclusive contracts with health trusts Patientline established the perfect moat. How could it go wrong?

Poor management led to increasing losses instead of a steady march to profitability. Bad press and a six-month Ofcom investigation depressed sentiment despite its "no action" conclusion. Three chief executives, three FDs and recently the chairman have gone. To cap it all some hospitals now allow mobile use.

2. Torotrak (LSE: TRK)

Price in 2000: 550p
Now: 39.5p

This discussion board favourite had a world-beating automatic gearbox that worked and saved fuel. Toyota, GM and others had conducted successful tests. A major order was surely round the corner. How could it go wrong?

Car manufacturers, despite their constant model changes are as conservative as quill makers when it comes to major components. Toyota then GM decided that their existing gearboxes were just fine. The major order is still around the corner.

3. Medisys (LSE: MDY)

Price in 2000: 135p
Now: 2.55p

Another discussion board favourite had a world-beating safety syringe that prevented accidental nicks. The device worked and US legislative changes looked like forcing hospitals to use such devices. Even better, Medisys had other products which fans claimed justified the share price on their own. How could it go wrong?

The safety syringe suffered delays and in 2003 failed safety tests at Medisys's marketing partner. The other bright light, a blood glucose monitor, suffered disappointing sales due to fierce competition. Recently the share priced halved when the board capitulated and sold all its businesses for $43m cash.

Think like an investor

The problem with the above shares is that mere mortals like you and me cannot evaluate the likely future earnings and especially the probability of failure to ever earn. A good estimate of fair value is beyond reach, so how can you know if you're paying too much? Our natural tendency is to think a great idea will succeed because of the prominence of great ideas that have succeeded. We want to believe we can get rich quick. Excitement is the enemy of rationality.

So by all means look for growth but think like an investor and pay a fair price. If you want to gamble go to the casino.

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