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The Smallcap Index Is Up Merely 1% from Its 2008 Top
Oct 22, 2018

I remember a conversation I had with a portfolio manager towards the end of 2017. He was worried that stocks were getting irrationally expensive and value-buying opportunities had diminished. Yet investors were flocking in droves to invest more and more money.

Let me tell you that no investor gets rich investing when the markets are irrationally expensive.

Take a look at the BSE SmallCap index chart...

On 7 January 2008, at the height of the previous bull run, the Smallcap index hit a high of 13,975. In the market crash that followed, the index hit a low of 2,867 on 9 March 2009. In other words, the Smallcap index tanked a whopping 79%!

From its 2009 low, the BSE SmallCap index has risen 391%, compounding at an annual rate of 18%.

But here's the most telling observation...

From its January 2008 peak to now, the BSE SmallCap index has gained just 0.8%.

If you factor in inflation, the returns are actually negative.

In other words, investors who bought smallcap stocks at market peaks and didn't go bargain hunting in the subsequent crashes didn't make any money.

Let me also show you how the Sensex performed during this same period.

The Dangers of Not Investing During Market Crashes

On 8 January 2008, the BSE Sensex had hit a high of 20,873. In the subsequent market crash, the Sensex plunged 61%.

Thereafter, from its 2009 low, the Sensex has risen 321%, compounding at an annual rate of 16%.

However, from its January 2008 peak, the Sensex has risen just 64% in more than a decade, compounding at a laborious rate of 5%.

The big points I'm trying to drive home are:

  1. You don't get rich buying stocks at irrationally expensive valuations during bull market peaks.
  2. You cannot expect to make superior returns if you don't invest during times of panic and uncertainty, when valuations are attractive.

So, be on the lookout for solid investing opportunities. Make staggered investments, so that if stock prices correct further, you can take advantage of lower prices.

Data Source: BSE India

This Chart Of The Day was published in The 5 Minute WrapUp - Should You Sell Your Stocks Now and Buy When the Bloodbath is Over?

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