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The effect of the stock market crash on the Microcap Millionaires portfolio - Views on News from Equitymaster

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  • Aug 31, 2015 - The effect of the stock market crash on the Microcap Millionaires portfolio

The effect of the stock market crash on the Microcap Millionaires portfolio
Aug 31, 2015

Many companies came falling down with the stock market crash of over 1,600 points last Monday. Not surprisingly, companies with smaller market capitalizations were even harder hit. This was amply evident from the fall of over 8.8% in the S&P BSE Smallcap Index on that day.

So what effect has this had on our Microcap Millionaires (MCM) portfolio?

Well, between our August 2015 issue of MCM  (which was just 2 trading days before the crash of 24th August) and today, this is what changes in the stock prices of our portfolio companies looks like -

Name of stock Price at the time of August 2015 Issue of MCM Prices as on 31st August Change
Venus Remedies 148 130 -12%
Gujarat Industries Power 85 72 -15%
Peninsula Land 26 23 -13%
HCL Infosys 50 38 -24%
Swelect Energy Systems 455 395 -13%
GSFC  74 67 -10%
Gujarat Alkalies and Chemicals 182 176 -3%
Globus Spirits 68 59 -14%
SAIL 58 50 -13%
Jindal Drilling 141 126 -11%
Dredging Corporation 407 346 -15%
Kakatiya Cement Sugar 108 98 -10%
Technofab Engineering 166 152 -8%
Maharashtra Seamless 163 167 3%
Kanoria Chemicals & Industries 59 47 -21%

As you can see, all except one of our MCM companies are down. Some significantly so.

So how should you be dealing with this sudden fall in our portfolio stocks’ prices?

For one, this crash has taken all the stock into a ‘Buy at current prices’ zone. But for those who have already bought these stocks, shouldn’t you buy more at these lower and more attractive prices? The answer is no.

It is pertinent to remember here that it is in the nature of investing that 100% of one's calls may not go right. In view of this, we ask you to limit your exposure in any one stock to not more than 3%-4% of their total MCM portfolio. And this is irrespective of how good the opportunity looks. It is always a sensible long term policy to not bet too much on it. Therefore, while you may buy more if the stock falls below the price at the time of our recommendation, you should not buy beyond the maximum allocation highlighted.

It is all about allocation

However, if you find yourself in a position where you can increase the total amount of funds that you have set aside for this service, only in such cases can you take advantage of the fall in stock prices to buy more of these stocks without increasing your exposure in any one stock to more than 3%-4%. Not to forget, you also should not disturb the overall allocation between stocks and bonds. Even while some of you may be able to do this, do keep this all important image in mind while deciding the total amount of funds you set aside for the MCM service. It depicts the ideal allocation to stocks of various market capitalizations within your overall exposure to equities:

As you can see, the MCM service fits into the very top of this pyramid (highlighted in red).

Stock market crashes are always great opportunities to load up on more of a good thing. However, as far as investing as per the MCM strategy is concerned, do keep these important caveats in mind while making your decisions.

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Oct 23, 2018 03:35 PM