Are You Buying Our Top 5 Microcaps? - The 5 Minute WrapUp by Equitymaster
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Are You Buying Our Top 5 Microcaps?

Nov 17, 2016
In this issue:
» The rally in PSU Banks
» An Indian CEO gets paid more than an American CEO
» ...and more
00:00
Rahul Shah, Co-Head of Research

Should you buy stocks right now? Our Microcap Millionaires team feels you should. They are out with their brand-new report: 5 Microcaps You Can Consider Buying Today.

But isn't the timing inauspicious? After all, the benchmark indices are in freefall. And the kind of bloodbath mid and small-cap investors are witnessing, no sane investor would touch them even with a 10-foot pole. Isn't it time for investors to turn panicky?

No.

Panic is for when a toddler in your charge goes out of sight in a crowded public place. It has no place in sensible investing. Do not let panic corrode your investment strategy.

Let's look at the facts.

A little over 25 years ago, on 21 June 1991, PV Narsimha Rao took oath as prime minister along with Manmohan Singh as financial minister. The Sensex on that day was 1,361. Today it's 26,330. That's growth of 20 times in 25 years.

Now try and recall this 25-year period.

The Babri Masjid demolition and subsequent riots...the worst foreign exchange crisis...nuclear tests...Kargil War...stock market scams...the IT bubble...the 2008 collapse...droughts...

Any of these events alone would have been enough to make investors panic.

Despite all the terrible things that have happened in the last 25 years, the stock markets have gone up 20 times. Go back ten more years to when the Sensex was rebased to 100, and it has returned a whopping 27,000% over 35 years.

Now remember this the next time markets turn jittery and leave you on the verge of a panic attack.

Please note we are not advising you to turn into a robot and not feel any emotions like panic at all. This is simply not possible. But you can't expect to give in to emotions like panic and do well in stocks.

What you need instead is a proven investment strategy and the discipline to stick to it at all times.

The Microcap Millionaires team religiously follows their proven investment strategy. It knows fully well that there are highs and then there are higher highs. And that there are lows and then there are higher lows. That's why the team believes in booking profits as well as rebalancing the portfolio periodically.

The team also understands the advantage of taking a small loss in the medium term rather than let it sit in the portfolio. It therefore does not believe in keeping any stock in the portfolio for more than two years.

In short, the service aims to take emotions like panic out of the equation and instead asks investors to coolly follow a strategy designed for long-term wealth creation.

Does it sound too simplistic? Well, remember what Charlie Munger once said: 'It is remarkable how much a long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.'

Besides, the service's 105% returns since inception versus the Sensex's 28% is perhaps proof enough.

Learn more about our report on Microcaps here.

03:08

What the average CEO gets paid in India looks an innocuous when compared to countries the US and the UK. A Livemint report points out that while the average pay for a CEO in the US and UK stand at US$ 16.95 million and US$ 9.6 million respectively, their Indian counterparts get US$ 3.1 million. So far so good.

But once you put these numbers into perspective, the scenario starts looking very different very quickly. As today's chart shows, once you compare the CEO pay to GDP per capita in the respective countries, India comes in second in the world! Only South Africa ranks higher. And the US comes in a distant third.

So while average Indian CEO gets paid 483 times India's GDP per person, the US CEO gets paid a much lower 299 times. What these numbers essentially tell you is that the difference in what CEOs pay themselves versus the standard of living of the average person in that country is very large indeed. And much larger than even much more developed countries like the US, UK and Canada.

India Beats US in Average CEO Pay


04:08

Even as most stocks in the Indian share markets get pummeled to the ground, banking stocks are having their day in the sun. Reports suggest that ever since the currency withdrawal has been announced, twenty-two of the thirty-nine listed banks have seen their stocks gain amidst widespread crashes in stocks across most other sectors.

Investors are getting very gung-ho about banking stocks indeed!

But do not get carried away with this trend. As we pointed out yesterday, banks have benefitted from the surge in deposits due to limits on the amount of money that can be withdrawn with the balance getting deposited in the account. However, banks having exposure to commercial real estate are also likely to face the music from the government's crackdown on black money. Among banks, Yes Bank has the highest share of exposure to commercial property at 6.8%. However large private sector banks such as Axis Bank, ICICI Bank, and HDFC Bank have shares of 4.3%, 3.2% and 2.2%, respectively. Largest bank State Bank of India has a miniscule 0.9% share of exposure to commercial real estate.

So while banks may be beneficiaries of the demonetisation in some ways, the many negative effects of this drive in the short term will indirectly affect the banking system too. It is hardly time to throw caution to the wind as far as banking stocks are concerned.

04:48

The Indian stock markets were trading mixed today on the back of alternating buying and selling activity across index heavyweights. At the time of writing, the BSE-Sensex was trading up by around 40 points. Gains were largely seen in pharma and metal and energy stocks.

04:56 Investment mantra of the day

"I don't read economic forecasts. I don't read the funny papers" - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

Today's Premium Edition.

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How to identify growing companies that are unlikely to 'go' anywhere.
Read On...Get Access

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