When you’re a part of the noise, your cognitive behaviour is impaired. It is therefore important to thrive in chaos.
By Baniya Beast,
May-end/June should mark the start of one more long-term rally in Smallcaps. Let us dwell on the past for sometime and learn the same old googly of the market.
Four year long rally
From September 2013 to January 2018, BSE Smallcap Index rose from 5,230 to 19,983. That’s an increase of 282% in approximate 4 years, translating in CAGR of ~30%.
Good companies performed even better
These massive gains were at index level which is a basket of good/bad/ugly companies. Now imagine the average returns of a company which is in expansion phase, with clean balance sheet and healthy return ratios. Dalmia Bharat, IIFL Holdings, Natco Pharma, NBCC, TVS Motor Company, Page Industries, Biocon, Ashok Leyland, Rajesh Exports, and 3M India, these companies gave returns of 100-600%!
Let’s visit the pre-rally period
Smallcap index showed subdued price performance (even though earnings were steadily growing) for an entire year from November’10 to December’11. Rather there was sharp correction of 49.9%. You would surely be sobbing back then if you looked at the moneycontrol app everyday with negative portfolio returns.
All the madness from 2013-2018 was not possible unless the market did what it did. Therefore be in LOVE with the chaos.
Post the fall – 100% return in next 2.5 years
In next two and a half years, the BSE Smallcap index re-tests its earlier peak (~10,580) but this was not a one way straight rally. The markets consolidated for few months and just acted lethargic to move. You gotta be invested during these testing times like Rahul Dravid does.
I recall a not-so-famous dialogue of Nawazuddin Siddiqui from Vikramaditya Motwane’s Sacred Games.
Aadmi suit pehne ya lungi, life mein daring hona mangta.
If you were a part of the chaos in December 2011 when the markets were bleeding everyday (exaggerated), you would be cursing yourself to buy at bottom because everyday new bottom is formed and suddenly the stock is down 20% from your costing which you thought was the low. You’re upset, you’re frustrated and you’re fearful. A red portfolio kills your sleep and haunts you.
But it is exactly then you start investing and become detached to the change in security prices.
Hypothetically, say you buy the Smallcap index when it is down 40% from the top of 10,900 which comes to 6,540 (thinking this is bottom). This is somewhere in November 2011. Post this you see continuation of the correction. Now the Smallcap index is reduced to 5,465 in just one month i.e. by December 2011 you’re down 16.4% (from what you thought was the bottom).
So when will the Smallcaps move?
If we look at the data from January 2018 (just before the levy of 10% LTCG) till date then BSE Smallcap index is down ~29.7%. This sharp correction is now in the 16th month and the chances of it getting extended are less.
Punters – Missing!
These are the players/operators who trade in cash margin funding segment where the stock broker lends you at 12-15% for up to 3 times leverage. They get delivery of the stock so do not confuse it with Futures position. These players are absent from the market for a long time now. There was an unprecedented pressure in market in past one year and these punters were unable to fund the margin call thereby leading to continuous unwinding of their positions.
When are the Punters coming back?
See these Punters stopped speculating post 30-40% fall in security prices because Election could again derail their positions. They will be back post Elections (regardless of which party forms the Government) because majority of the downfall will be over till then. If NDA wins then they start buying from next day onward and if NDA fails to form the government then market will tank 15-20% in next few days and these Punters then commence their buying. So in all, May-end/June should mark the start of one more long-term rally in Smallcaps (unless of course Trump screws us).
Well only time can tell whether this hypothesis passes the 95% confidence interval (of course not statistically).
The trick is not to panic and keep accumulating. If you’re fully invested then stop following the security prices and just focus on fundamentals.
I would love to know whether this post made you buy more of your high-conviction stocks. Did it give you some statistical comfort & fearlessness to punch that BUY order?
This article was originally published by author Baniya Beast.