Below is the table illustrating the % returns delivered by Sensex as well as BSE Small Cap Index every calendar year since 1st April 2003.
Small Cap stocks are known to deliver impressive performance when bulls rule the markets, but they get battered during a bearish regime. For instance in 2009, Sensex was one of the best performing markets vis-a-vis its peers. This was on account of the positive impact of the stimulus released by the Government and the election results, which led to confidence among investors and corporate India that a stable government at the centre will be able to bring in a lot of reforms. This saw the index posting a superb return of 81% while the BSE Small Cap Index actually delivered an impressive 123% during the same time horizon.
This could be attributed to the fact that during market upturns small cap companies normally outperform their larger peers, since the latter would have already reached their peak in terms of the potential to grow in the future, while the former actually gets to unlock its growth potential as there is a long way for them to reach the maturity stage.
Similarly, if we look at performance of various indices in 2014, Sensex has given returns of 29.9%, however BSE Small Cap Index has given whopping returns of 68.8% during the same period. In fact, 2014 was one of the best year for small cap companies after 2009 as many little known companies with good fundamentals turned multibagger during this year itself.
Looking at current scenario, Sensex has made all time high of 40,312 recently on 4th June and closed at 38,736 during this week. However, Small Cap Index closed at 13,777 and is still down by almost -33% from its all time high of 20,183 made on 15th Jan 2018. Money has moved from small caps to large caps during last 1.5 years, this has pushed the Sensex to life time high leaving small cap companies to their 52 week lows. Negative sentiments towards small caps have not only brought down companies with poor fundamentals down but also the fundamentally good businesses at historically low valuations. Hence, buying right set of small caps with robust business fundamentals now can be an excellent wealth creating multibagger opportunity in long run.
There are a lot of reasons why investors should not directly get into small cap stocks as some of them can be illiquid and concerns may arise about the way the company is being professionally managed. Moreover, these companies have limited media coverage and they are largely unknown among investors, which means the information in public domain will be very limited.
Investors who want to invest in small cap stocks should go by advise of professionals who have the expertise to spot these hidden gems. We believe that with BSE Small Cap Index trading nearly 33% below its all time high, this is the right time to get into small cap stocks. However, this category is recommended only to investors who are ready to take a little extra risk to get the additional upside in their portfolio and also have the patience to wait to reap the benefits.
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The Bulls, The Bears & The Farm
A bull market is when everything in the economy is great, people are finding jobs, gross domestic product (GDP) is growing, and stocks are rising. Things are just plain rosy! Picking stocks during a bull market is easier because everything is going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a "bull" and is said to have a "bullish outlook”
A bear market is when the economy is bad, recession is looming and stock prices are falling. Bear markets make it tough for investors to pick profitable stocks. One solution to this is to make money when stocks are falling using a technique called short selling. Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a bull market. If a person is pessimistic, believing that stocks are going to drop, he or she is called a "bear" and said to have a "bearish outlook".
The Other Animals on the Farm - Chickens and Pigs
Chickens are afraid to lose anything. Their fear overrides their need to make profits and so they turn only to money-market securities or get out of the markets entirely. While it's true that you should never invest in something over which you lose sleep, you are also guaranteed never to see any return if you avoid the market completely and never take any risk.
Pigs are high-risk investors looking for the one big score in a short period of time. Pigs buy on hot tips and invest in companies without doing their due diligence. They get impatient, greedy, and emotional about their investments, and they are drawn to high-risk securities without putting in the proper time or money to learn about these investment vehicles. Professional traders love the pigs, as it's often from their losses that the bulls and bears reap their profits.
What Type of Investor Will You Be?
There are plenty of different investment styles and strategies out there. Even though the bulls and bears are constantly at odds, they can both make money with the changing cycles in the market. Even the chickens see some returns, though not a lot. The one loser in this picture is the pig. Make sure you don't get into the market before you are ready. Be a long term discipline investor and continue to invest systematically during bull as well as bear phase of market cycle and never invest in anything you do not understand.
Many retail investors started investing in small and mid cap stocks during bull phase of broader market (2014 – 2017) and getting worried now about their investments looking at losses they are bearing due to carnage in stock prices during ongoing bear phase (2018 – 2019). Those who believe they made a mistake by investing in small and mid caps and think to exit booking losses due to fear of further loosing hard earned money, do think about this old stock market saying: "Bulls make money, bears make money, but pigs just get slaughtered!"
In our recently released report - Multibagger Small / Mid Caps & Long Term Investing, we have shared valuable insights to make you understand why we believe buying the right set of small and mid caps now can be a massive wealth creating opportunity in the long run. Under this report, we have covered long term monthly charts of many of our own small and mid cap stocks recommendations (released under Hidden Gems and Value Picks) over last 9 years which at one point of time were down by 50% to 70% from their peak but turned out to be multibagger stocks in longer run delivering 5x to 64x returns.
Click here to receive our Multibagger Small / Mid Caps & Long Term Investing report directly in your inbox, a must read for investors who started investing in equities during last couple of years.
Do not stop investing in small caps looking at these turbulent times, its time to do the opposite, this phase has happened before and small and mid caps have always bounced back. Good sentiments as well as bad sentiments do not last forever.