Should You Buy New or Old Stocks in This Market?

Are you being greedy now when others are fearful?

If the answer is yes, what are the kind of stocks are you buying?

Are you averaging the existing stocks in your portfolio or are you buying new ones?

Well, if you are sitting on a few multibaggers and are looking to buy the same stocks again, this editorial is for you.

If you bought a stock say in 2020-21 and which became a 10-12 bagger but has now fallen 30-35%, there could be better options than buying more of the same stock. You could perhaps be better off buying a brand-new stock than buying more of the same one.

At least this is what my recent small study revealed.

Take a look at this portfolio of 30 stocks.

Well, these are the unsung heroes of the previous small cap bull market i.e. the bull market between August 2013 and January 2018. These are small caps i.e. outside the top 250 in terms of market capitalisation.

This was the period when the BSE Small Cap index went up more than 4x, a gain of 300%.

Any idea how this group of 30 stocks performed? Well, an equal weighted portfolio of these 30 stocks went up by a whopping 22.6x.

Yes, that's right. A portfolio with an equal amount invested in each of these 30 stocks would have seen Re 1 turn into Rs 23 in a short span of 4.5 years.

So, this would have been a 23-bagger portfolio compared to the 4-bagger returns of the BSE Small Cap index, a huge outperformance.

Well, this bull market ended in January 2018 and the markets did not start recovering until March 2020 when the BSE Small Cap index had crashed almost 56% from the top.

Yes, from its highs in January 2018, the BSE Small Cap index fell a whopping 56% before it started recovering from March 2020 onwards.

And what a recovery it has been. Between March 2020 and December 2024, the BSE Small Cap index has gone up an impressive 6.5x.

In the bull market between August 13 and January 2018, the BSE Small Cap index went up 4 times but this time, the gain is even better at 6.5 times.

Let us go back to our portfolio of 30 stocks, which did so phenomenally well in the previous bull market and were collectively up a whopping 23 times.

So, how did the same group of 30 stocks perform in the next bull market i.e. between March 2020 and December 2024?

To be honest, the performance was a little underwhelming. The same 30 stocks which went up by 23x in the earlier bull market, was up only 6.3x times in the current one.

Yes, did they did not even manage to outperform the 6.5x returns given by the BSE Small Cap index.

Although their performance is not poor, it is not very good either and it definitely pales in comparison to the time when the group was up 23 times in the last bull market.

Well, this tells me that if your stock is a multibagger and has outperformed the benchmark index by a huge margin, it may not end up being an outperformer in the next bull market.

The group of 30 stocks failed to outperform in the most recent bull market. After a wonderful performance in the previous bull market, they could not repeat the performance in the most recent one.

Hence, it may not be a good idea to buy more of the same multibagger stock in a market correction. The new bull market, whenever it comes, could give rise to new multibaggers and new themes. The old multibaggers and the old themes may no longer work.

It won't be a bad idea therefore to buy a new set of stocks instead of averaging out the existing multibaggers.

But which stocks exactly?

How do we identify a new set of stocks with the risk-reward equation in our favour and with a good chance of outperforming the benchmark indices?

Well, in the most recent small cap bull market, what if I told you there was a group of 30 stocks which did significantly better than the BSE Small Cap index and was not at all hard to shortlist.

An equal weighted portfolio of this group of 30 stocks went up an impressive 15.5x between March 2020 and December 2024.

Yes, that's right. A portfolio with simple buying rules, massively outperformed the BSE Small Cap index.

But what are these simple buying rules? And how did they help in putting together a portfolio of market beating stocks?

The buying rule is simple. You want to buy Rs 100 for Rs 80 or lower and make sure that the company does not have a lot of debt on its balance sheet.

Put differently, all the stocks in the 30-stock portfolio were bought at price to book (PB) value between 0.3 and 0.8 and had debt to equity ratio of less than 1 for the latest financial year.

That's it. There was no other rule.

The 30-stock portfolio was chosen from the small cap universe i.e. the universe of 500 stocks outside of the top 250 in terms of market cap.

So, all the 30 stocks came from this universe of 500 stocks such that they were trading at a discount to their book values and had debt on the balance sheet less than equity.

It is this simple portfolio that gave an impressive return of 15.5 times between March 2020 and December 2024 and outperforming the benchmark's 6.5 times return.

I believe what worked in favour of this portfolio is the very attractive valuation as well as the low debt on the balance sheet.

By ensuring that we are not overpaying, and we are buying a decent quality stock, we were able to have the risk-reward equation firmly in our favour.

Thus, a simple portfolio of attractively valued stocks and strong balance sheets, was not only able to outperform the biggest gainers of the previous bull market but also the benchmark index itself.

Those who are looking to buy a new set of stocks and do not want to average out their existing winners, should consider buying based on these simple rules.

But please note that if you buy such stocks, you have to buy them in a group of at least 15-20 stocks if not 30 and NOT shortlist 2-3 of what you think are the best ones.

This is a group-based approach to investing and not individual stock-picking. You have to look at the performance of the group as a whole instead of focusing too much on individual stocks.

Therefore, just to summarise, the multibaggers of the previous bull market may not necessarily outperform in the next bull market.

Hence, instead of buying more of an existing multibagger in your portfolio especially after a bear market, you could be better off investing in a new set of stocks.

This new portfolio can be based on simple buying rules where you are buying at attractive valuations and ensuring the company is not highly leveraged.

You need to buy at least 15 to 20 such stocks and take a group-based approach and then hold it for at least 2-3 years if not more.

A new bull market may need you to invest in a new set of stocks and the criteria we just discussed is not be a bad place to get started.

Happy investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)