The Answer to Your Wealth Worries: Small Caps (Especially Now) - Profit Hunter by Equitymaster
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The Answer to Your Wealth Worries: Small Caps (Especially Now)

Jul 10, 2018

Richa Agarwal, Research analyst

Small cap stocks have been drifting in a sea of red - every day they go down more than the day before.

The BSE Small and Mid cap indices are down over 20% and 15% from their highs touched at the start of 2018.

It seems impossible to wait it out...

It's especially frustrating because they have just been going higher and higher in the past year.

And now this!

How did this happen?

Does this mean the small cap space is unreliable? Unsafe?

Is it a wealth destroyer?

What should I do?

Stay away...or is there a better way...

These are the questions investors are asking themselves...

But these - below - are questions I believe investors should be asking themselves...

Do I believe in the business I invested in - or am about to invest in?

Is it fundamentally strong? A business with a wide moat? Is it run well - ethically, by a capable leader at the helm?

If the answer is NO - get out now.

If the answer is yes - sit back, relax, buy more.

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Some are high risk…Some aren't managed well…Some even lack a sustainable business model….

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We call such small caps - Junior Blue Chips.

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Small caps are the answer to your wealth worries...

I believe, without a doubt, that the small cap space has the potential to multiply wealth several times over.

That is why I have dedicated my life to this space.

Even everyone's favourite investor, Warren Buffet believes in the small caps...

  • 'It's a huge structural advantage not to have a lot of money.

    The universe I can't play in has become more attractive than the universe I can play in.

    I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in.'

Essentially, Buffett is saying that if he didn't have a lot of money, like billions of dollars, he would be investing in small caps - ie, the universe he can't play in.

But you can play in it, dear reader.

And if you play well, it will absolutely, positively multiply your wealth.

What Makes Small Caps So Important for Wealth-building?

Big companies have already seen most of their growth, but tiny companies are still sitting on the runway, waiting for take-off.

Consider Maruti Suzuki, for example. Over three years from August 2014 to August 2017, the big Indian auto company has handed shareholders a 173% gain.

Take a look:


Now, that's actually quite an impressive return for a company the size of Maruti Suzuki.

But it's still nothing compared to the potential of small-caps.

Over the same time-period, a small auto ancillary firm called Minda Industries Ltd. soared a staggering 966%, see for yourself...


That's enough to multiply Rs 1,000 investment by over ten times to Rs 10,659.

This is the power and promise of small caps.

So, here's why every stock market investor should have the best quality smallcaps in their portfolio...

  1. High growth potential: Unlike big businesses that have already matured, small caps are at an early phase in the business cycle. This makes the growth potential of quality small caps enormous.
  2. Lifecycle of a Business


  3. Valuation disconnect: Good quality smallcaps tend to significantly outperform largecaps in the long-term. But the key word is 'long-term'. Investors need to be patient with smallcaps. Because of their lack of visibility and low liquidity, it may take some time for smallcaps realise their potential. But the wait is worth it, because when it is realised, the returns are huge. You can use this period of valuation disconnect to your advantage by slowly accumulating such stocks.
  4. Lack of institutional ownership: Remember Buffett's words? Institutional investors are busy hunting elephants. This is great news for the aam investor. If you can get in early, before the big guys, then big gains await you!
  5. Liquidity: Many smallcaps are not heavily traded. This could offer a good buying opportunity. A good quality smallcap, which is growing earnings over time, will attract attention. As the public becomes aware, demand for the stock goes up. When this happens many investors bid for a limited number of shares on offer. The result? You guessed it! The stock price rises rapidly...and early investors in these stocks end up with big gains.

If you believe that high quality smallcaps belong in your portfolio, then the next logical question is how do you find them?

Smallcaps are more volatile than largecaps.

How to mitigate the risks?

How much exposure should you take in each small cap?

I do this for a living. And I can assure you, the process is not easy.

But the good news is that you don't have to do the heavy lifting yourself. I've got you covered. My service, Hidden Treasure's been going great guns.

Since its launch 10 years ago, the service has beat the Sensex almost 3X.

We have uncovered serious winners like Page Industries, eClerx Services, NIIT Technologies, Balkrishna Industries, City Union Bank, Indoco Remedies, PI Industries, Astral Polytechnic, Vinati Organics and many more!

Of course, you can't buy these stocks at current prices. They've already made their investors a lot of money.

But you know why NOW is the best time to get into the new generation of small caps set to explode?

Because of the recent small cap crash.

Yes, the segment everyone is worried about - is exactly the place to make your money now.

If you can put reason before emotion, and invest in these high quality but fallen stocks... that's where the difference lies.

But be safe, dear reader. Be certain. Put your faith and money in the right place.

If you want to know which ones you can add to your portfolio right away, you can always just follow my recommendations.

Either way, don't turn away from small caps - our markets have great offerings in this space right now. For the sake of your future - seek them out today.

Regards,

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

PS: When the markets nosedive, that's the best time to put wealth building in motion. Small caps are crashing - that only means there is more opportunity than ever to buy them up - get our market-beating small caps recommendations here.

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