Why I Believe It's Not a Good Idea to Wait More to Buy Smallcaps

A friend recently asked if he should wait for more correction or starting investing now in the markets.

He was referring to an article which suggested that markets have not capitulated yet. And more pain could be on the way.

He wanted to ensure he enters at a perfect time where the chances of losses were minimal. He did not mind waiting.

Are you waiting on the sidelines too, dear subscriber...waiting for a better entry levels?

Before I share my views on this, let me be upfront with you. I don't have a clue what markets will do in the near term.

Sensex is down just 14% from the peak. The smallcap index has taken a sharper hit of 20%, but it is still at levels higher than the peak in 2018.

With the ongoing macro developments like Russia Ukraine war, rising interest rates, inflationary pressures, lock down in China, supply chain challenges and FIIs exiting, one could possibly see more correction in the near term.

However, these are not the factors I'm looking at while making recommendations.

For one, benchmark indices are hardly a reflection of the investible opportunities a retail investor has access to. Just three sectors - Banks/Financial institutions, IT and oil and gas together hold 70% weight in the Sensex, that itself is focused on just 30 stocks.

Now there are more than 5,000 stocks listed in stock markets. Of these, more than 80% are in the smallcap category. Even the smallcap index just lists a little above 900 stocks. And that leaves a long list of companies that broader indices will tell nothing about.

Just looking at the benchmark index statistics, you may not realise that some of the good quality smallcaps are down by 30%-50% this year. And could offer a great entry point for those looking beyond benchmark index statistics.

I have been looking at smallcap space for more than a decade for my smallcap recommendation service Hidden Treasure. The stocks in this space are far more volatile as compared to large caps. They are more sensitive to markets sentiments, liquidity in the markets and macro developments than their bigger counterparts.

If there was a way for me to perfectly time the markets, I sure would have used that skill in picking stocks.

However, there is no way I can predict the geopolitical events (like Russia Ukraine war, or the rise of a pandemic or its multiple waves, or a neighbor country deciding to go for a shutdown) or for how long they will impact the markets.

That's a feat no genius has achieved.

So I instead focus my efforts on things that I can control - finding great businesses in smallcap space, betting on the right management team and most importantly - margin of safety.

Now this does not often offer the best results in the short term.

When the markets sentiments turn negative, we do witness sharp corrections in the stock we recommend.

During 2008-2020, when smallcaps were in a downcycle, I remember quite a few stocks being down 30% and more from the recommendation price.

However, in the long term, this approach has served us well for more than a decade, from February 2008 till date.

Our process factors in the impact of volatility, and always considers a long term horizon period of 3 to 5 years. Over this interval, it is the business and industry specific fundamentals that influence the stock prices, as compared to multiple variables on the macro economic front that end up being noise.

Overall, six of the 10 recommendations we make are successful.

While this success ratio may not seem a big deal, the gains made in these recommendations far outweigh the losses in some stocks that do not turn out as expected.

In fact, they are big enough to beat benchmark indices by a wide margin.

We recently got our track record audited. And here are the results.

Since launch in February 2008 until March 2022, Hidden Treasure's internal rate of return (IRR) stands at 26.8%. This includes all open and closed positions.

Over the same period, the compound annual growth rate (CAGR) is 7.9% for smallcap index. For Sensex, the CAGR over this interval stands at 8.7%.

Now that's a decent return on the stocks we recommended.

I don't ever recall wondering what markets will do in the near term while making or holding these recommendations. My team and I were focused on good businesses that were available at attractive valuations.

Even when market sentiments were negative and stocks corrected, our understanding of the business and management was good enough to not make us press the panic button.

So unless you have a crystal ball that you could gaze into and see future with utmost clarity, I would recommend you to avoid the tendency to time the market. And focus on a process that works in the long term.

As a small investor, you are competing against sophisticated big investors. Your biggest edge is not in predicting macros. Even experts are spectacularly failing at that.

Your edge lies in finding and getting into solid businesses and stocks that are small in size - beyond the reach of big investors. And in holding on to them till they become big enough for institutional investors and get rerated. I hope you will play to your strength.

For more such investing insights, stay tuned.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure

PS: Speaking of whether it is a good idea to wait or get in now, it is worth mentioning here that the insiders in some of the quality businesses are not waiting for a big correction. They have already been increasing stakes in the businesses, buying from the open markets at levels higher than what stocks are currently trading at. Do check out my recent video to get a list of these stocks.