Small-Cap Stocks Are Down 38% from Their 52-Week Highs - Chart Of The Day 9 July 2018 - Equitymaster

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Small-Cap Stocks Are Down 38% from Their 52-Week Highs
Jul 9, 2018

Small-caps seem to be displaying withdrawal symptoms right now. It's like Sanju baba trying to wean himself off drugs. Expectedly, it's a painful process.

But trust me... such corrections are a healthy part and parcel of the game of investing.

In one of my earlier editorials, I had shown how the BSE Sensex is not a truly representative market barometer. While the Sensex continues to stay steady close to its all-time high levels, the rest of the market has corrected significantly.

Today, I've carried out a similar study on the BSE Smallcap index.

Here's what I found...

The average (both mean and median) correction of the BSE Smallcap index stocks has been 38% from their respective 52-week highs.

I arranged the small-cap companies based on the extent of their correction from their respective 52-week highs. I came across some insightful revelations...

  • About 23% of the small-cap stocks have corrected more than 50%.
  • 65% of them have corrected more than 30%.
  • Just 51 stocks have shown relative resilience and corrected 10% or less.

I hope this offers you a big picture perspective of what's going on in the small-cap space. You're not the only one witnessing your small-cap investments in the red. But what you do now will differentiate you from the average investor.

When the average investor sees his stock portfolio in the red, he tends to get engulfed by a sense of fear and gloom.

It's a natural response. We all hate to see losses and failures. It's painful and frustrating to see your shareholdings go below your cost price. Or to see your gains wiped out.

When faced with the pain of loss, the general human tendency is to find ways to reduce this pain. This is why most investors respond to this situation by reducing their engagement in the stock markets.

They track their loss-making positions less frequently. They stop discussing it with their friends and colleagues. They avoid booking losses in positions that demand such an action, and quietly hope and pray that the share price will rebound and go above their cost price.

But here's the bitter truth...

Your emotional need to reduce psychological pain may not help maximise your portfolio gains. Only by embracing the pain and wiping off the mental fog can you expect to outdo your fellow investors.

You see, this is the very reason why legendary investors like Warren Buffett manage to spot winning investment opportunities when most other investors are in are deep fear, panic, and gloom.

I believe that the ongoing market correction could offer some fantastic buying opportunities for disciplined and patient small-cap investors.

Data Source: Ace Equity
*Correction level calculated as difference between stock price from respective 52-week high and 5 July 2018

This Chart Of The Day was published in The 5 Minute WrapUp - Is 'Sanju Baba' Behind the Crash in Small Cap Stocks?

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