2008 Was the Best Time to Know Small Caps... And So Is Now - The 5 Minute WrapUp by Equitymaster
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2008 Was the Best Time to Know Small Caps... And So Is Now

Oct 10, 2016
In this issue:
» Retail investor are back with a bang
» Start-up lessons from the world's first edible cutlery
» Market roundup
» ...and more!
00:00
Tanushree Banerjee, Co-Head of Research

We were no strangers to unfriendly managements. Nor did paucity of data ever held us back. But this was a different ball game altogether!

The year was 2007 and stocks were going up like there was no tomorrow. And small-cap stocks in particular were on fire. The BSE Small-Cap Index gained 50% in the first nine months of the year. And everyone from the neighborhood uncle to the friend at a dinner party had a small cap to recommend. They stared at the foolishness of anyone resisting to buy stocks without a fundamental check.

We knew the time had come to separate the wheat from the chaff. We started travelling as much as possible to meet the managements of small companies in their obscure, far-flung offices. Some were suspicious of our curiosity about their businesses. Some turned us away thinking we are agents of their competitors. But a few meetings turned out to be eye-openers.

The promoters running the show of some niche businesses seemed like fanatics wanting to prove a point. They themselves had a significant portion of their wealth invested in the business. And they weren't afraid to make changes that could bring their businesses to an inflection point. They weren't just focused on widening the moat. They took their bigger competitors head on in terms of growth and profitability.

But that's not the best part...

The best part was that the businesses were so small that even incremental improvements in efficiency and profitability could make big difference to the stock price!

And Charlie Munger's words encouraged us to keep meeting with these fanatics...

  • Occasionally, you'll find a human being who's so talented that he can do things that ordinary skilled mortals can't. I would argue that Simon Marks - who was second generation in Marks & Spencer of England - was such a man. Patterson was such a man at National Cash Register. And Sam Walton was such a man. These people do come along - and in many cases, they're not all that hard to identity. If they've got a reasonable hand - with the fanaticism and intelligence and so on that these people generally bring to the party - then management can matter much.

The valuations at the peak of 2008 offered little scope to recommend many small-cap businesses. That was the time to sift through the loads of rubbish to find the gems whose true potential was underpriced.

We had barely started recommending a few small caps when the market crash took the euphoria out of investor sentiment. People had lost so much money following tipsters and brokers that small-cap investing seemed like a gamble to many.

Incidentally, the market crash made it absolutely evident that there were few businesses that could resist the worst. And that made us all the more confident to recommend stocks to Hidden Treasure subscribers. The last few months of 2008 was possibly the best time to know about small caps that were going to deliver big over the next five to ten years.

Stocks like Page Industries, e-Clerx Services, NIIT Tech, and Balkrishna Industries, which we recommended during this period, proved that small caps can create loads of wealth. Provided they are well researched and bought with ample margin of safety.

It's been a while since Hidden Treasure started making a difference to small-cap investing. Having completed eight years in 2016, my colleague Richa, who has been heading the initiative for a few years, conducted a detailed review of the hits and the misses.

Turns out that the service has been profitable not for just the initial set of Hidden Treasure subscribers, but also for those who've joined us since then.

Considering returns for all Hidden Treasure recommendations - successes and failures - the median return stood at 26% CAGR (compound annual growth rate). Now, that's just one metric. Even the internal rate of return (IRR) came out to be an impressive 33%. (IRR is a metric used to determine the profitability of investments/projects undertaken. It indicates the rate of growth a project is likely to generate.)

More importantly, the service managed to deliver nearly three times the returns of the benchmark small-cap index. Now, this is a track record to be proud of whichever way you look at it.

Not surprisingly, our subscribers have some great things to say.

  • Your Hidden Treasure is a beacon of light in these troubled times. I am happy I took the right choice. - PS Sathyamurthy, Hidden Treasure subscriber since 2008

Now, the small-cap space has grown over the years. And Richa and her team are meeting loads of intelligent fanatics.

Of course, the current valuations do not make all of them compelling buys. But this is possibly the best time since 2008 to know about small-caps that are must buys at attractive valuations.

In fact, just recently we released the latest edition of our extremely popular report- Steady Income Smallcaps. In this report, we discuss three small cap stocks that could potentially deliver both an attractive dividend yield and overall returns.

Now, this report is available only to members of our Hidden Treasure service. If you want to get your hands onto this report, now may be a great time to try Hidden Treasure.

There is one other reason why you should consider signing up for Hidden Treasure right now...

You see, like I mentioned, Hidden Treasure completed 8 years in 2016. And in all these eight years, the subscription price has remained unchanged. But that is changing...now!

Yes, starting tomorrow the effective usual price for Hidden Treasure will increase by about 50%.

But you still have time...till midnight today...to sign up for Hidden Treasure and lock in the old price for life!

I hope you make the most of this opportunity.


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It’s almost 6 pm, and we are writing in again today to remind you...

Act now and you can save 50% in the Hidden Treasure subscription fees.

You know the work we put into our research through our articles.

And you also know that we are an independent research company...our views are thoroughly researched and totally our own...we are not guided by advertisements or commissions.

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------------------------------

03:00 Chart of the day

Are retail investors flocking back to the stock markets?

Yes, we came across some compelling data last evening that suggests so. Take a look at the chart of the day. It shows the trend in retail holding as a percentage of the total market capitalisation of the Nifty 500 index. As you can see, retail holding appears to be at its highest level in five years. And over the last couple of years, there has been a clear uptrend in retail shareholding.

Retail Investor Participation Picks Up Steam


The trend is further validated by the sharp rise in new demat accounts openings. In 2011-12, total new demat account additions stood at 10.2 lakh. In 2013-14, the number had dropped to 7.7 lakh. However, in the very next year (2014-15) when Narendra Modi became Prime Minister of India, the new demat account openings shot up to 14.8 lakh. And in 2015-16, the number further went up to 20.4 lakh. In short, new demat account additions doubled in five years. This takes the total demat accounts of the two depositories to 253.6 lakh in March 2016.

That's a clear indication that retail investors are back in the game. There are several reasons for this.

One major reason is the buoyancy in the Indian stock markets. After the market correction in February this year, the benchmark indices have been in an uptrend. From its February low, the BSE-Sensex is up 25%. Several small and mid cap stocks have delivered much higher returns.

The other major reason is the revival of the IPO market. Last financial year, a total of 74 IPOs hit India's capital markets. This is the highest in five years. And the momentum is still strong. Since April 2016, more than 25 new IPOs have hit the market.

So, is India finally entering a multi-year bull rally?

In our view, this is a wrong question to even ask. It reeks of speculation.

History tells us that retail investors are terrible at market timing. Most of the times, they are late entrants to the party. So, if you notice more and more investor enthusiasm in the coming months, see it as a sign of caution and act accordingly.

In our recommendation services, we have a solid system in place to avoid falling prey to sentiment-driven market rallies. In fact, we have made it a practise to recommend a 'Buy' view on stocks only if we find value in the business. So, if you subscribe to Hidden Treasure, don't expect a 'Buy' recommendation every month. There will be times when Richa and her team will ask you to wait until the valuations are attractive. Because we know patience and prudence pays in the long run. And unlike brokerages, we have no secret agenda or obligation to give 'Buy' recommendations even if we are not convinced about the investment prospects. So, invest safely and wisely.

04:00

Ritika Bajaj, our friend from Common Sense Living is a start-up enthusiast. She does extensive research on start-ups and what it takes to be a successful entrepreneur. She just shared an inspiring success story of entrepreneur Narayana Peesapati, how he founded Bakey's, and why innovation is the future for companies in India. Here's Ritika:

  • Whenever Narayana traveled, he felt guilty about using plastic spoons to eat. He knew that excessive use of plastic would damage the environment.

    On one of his flight travels, he happened to see a fellow passenger eat dessert with a piece of khakra. This led to an idea and he founded Bakey's, a company that manufactures edible spoons and chopsticks.

    An innovative product indeed, Bakey's today has earned its place as the manufacturer of the world's first edible cutlery.

    Now let's understand why Bakey's is a truly innovative idea...and how it ticks off some of the important criteria of innovation by...

    CREATING VALUE: By creating edible cutlery, Bakey's reduces the consumption of plastic by the consumer, and hence reduces damage to the environment, thus creating value for both.

    CREATING THE 'NEW': Narayana's idea translated into a completely new product, and edible spoons were manufactured for the first time.

    CREATING MARKETS: It created a new market of ecologically-aware food consumers, who were educated about the harmful effects of plastic on the environment.

    CREATING AGAIN: Spoons existed before Bakey's, but edible spoons were created for the first time. Thus, it was not an 'invention' but an 'innovation' - a new improved form of what existed.

    CREATING SOLUTIONS: Narayana was upset with the use of plastic spoons, and this led him to find a new solution for the plastic issue and its impact on the environment.

    CREATING WITH LIMITED RESOURCES: Narayana invested his own seed capital and also used his kitchen at home as a laboratory for the first two years.

    CREATING CONNECTIONS: And finally innovation is about connecting the dots. It's about seeing patterns that no one else is seeing and converting those patterns into a reality.

    Narayana connected plastic spoons to the environment to noticing someone picking up food with khakra to the use of jowar, rice and wheat as good manufacturing agents... and conceptualised Bakey's - the manufacturer of the world's first edible spoons...

    Innovation is indeed an important aspect of startups and businesses. Of course there are many other aspects for growing a business. And you can learn more about them in our 21-day Indipreneur Launchpad Course that helps startups and business move faster toward growth. Know more about the course by clicking HERE.
04:30

After opening on a firm note, the Indian stock market indices shed the early gains and are now trading with marginal gains. While the metal and consumer durables are leading the sectoral gains, realty and energy sectors are facing selling pressure.

The BSE Sensex is trading higher by 45 points (up 0.2%) and the NSE Nifty is trading higher 19 points (up 0.2%). While the BSE Small Cap index is trading higher by 0.3%, the BSE Mid Cap index is trading lower by 0.1%.

04:50 Investing mantra

"Our approach is very much profiting from lack of change rather than from change." - Warren Buffett

Editor's Note : There will be no issue of The 5 Minute WrapUp on 11th & 12th of October on account of Dusserha & Muharram respectively.

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Ankit Shah (Research Analyst).

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