This Is Why You're Not Making Big Money In The Markets - Profit Hunter by Equitymaster
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This Is Why You're Not Making Big Money In The Markets

Jan 9, 2019

Richa Agarwal, Research analyst

Here's a question for you.

If given a choice between two investments that gave returns as shown in table 1 and table 2, which one would you pick?

Table 1:

Year Return
Year 1 8%
Year 2 8%
Year 3 8%
Year 4 8%
Year 5 8%
Year 6 8%
Year 7 8%
Year 8 8%
Year 9 8%
Year 10 8%
Year 11 8%

Table 2:

Year Return
Year 1 -63%
Year 2 110%
Year 3 108%
Year 4 -16%
Year 5 63%
Year 6 73%
Year 7 172%
Year 8 3%
Year 9 35%
Year 10 73%
Year 11 -32%
Data Source: Ace Equity, Equitymaster

In case you're confused, here is the kicker:

If you'd made the investment represented by table 1 you'd end up with a total return of 133% over this 11 year period.

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On the other hand, if you'd have picked the investment earning the returns shown in table 2, you'd end up a total return of 1,624%.

This comes to a compounded annual return of 8% for the first investment and 30% for the second.

Seems like a no-brainer isn't it.

But yet, attracted to the stability and lack of volatility of investment 1, that's what most people end up picking.

The biggest reason is that they cannot stomach the kind of declines investment 2 sees every now and then. Like in year 1, year 4 and year 11. These big falls, along with periods where the investment does nothing like in year 8, are too much to handle for the average investor.

So despite the final returns being massively higher for investment 2, most investors actually pick investment 1.

As you've probably guessed by now, investment 1 is your average bank fixed deposit. Consistent returns, year after year.

Investment 2 on the other hand is the returns delivered over the last 11 years by my latest recommendation under Hidden Treasure - my small cap recommendation service.

Now make no mistake, I've only just recommended this company and didn't 11 years back. But its return profile perfectly exemplifies the kind of returns successful small cap companies can potentially give: volatile - but well worth it in the end.

In fact, this volatility is something to take advantage of.

For example, if you'd have invested after the falls in year 1 and year 4, your compounded annual return would have shot up to 47% and 44% respectively.

The good news? As you can see in the table, the stock has just seen an upwards of 30% fall over the last year. Need I say more?

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This company hails from the auto sector. And in case you're worried about the potential disruption from electric vehicles, you should also know that whether it is two-wheelers or four wheelers leading the EV disruption, or whether ICEs will prevail eventually, this company stands to gain from all of these outcomes.

You see, the component it supplies finds application in all types of vehicles.

What makes it so unique and critical for its clients are strong technical support with focus on quality, low costs, and most importantly, logistic support. The manufacturing facilities are spread across India, close to the facilities of its clients, offering it a strong edge over its peers.

And like I just told you, amid the recent correction in the small cap space, the stock is down by more than 30%.

Will you be the one to take advantage of this volatility?

Regards,

Richa Agarwal
Richa Agarwal (Research Analyst)
Editor, Hidden Treasure

PS: Richa Agarwal has travelled across the country to discover the small caps that grow up to become tomorrow's blue chips. Her services are exceptionally popular - and since 2008 have beat the markets nearly 3X. Grab your subscription now to start your own wealth building journey.

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