Why You Should Be Excited, Not Sad, About the 30% Small Cap Crash

Yesterday I told you that we are now firmly in a bear market - especially when it comes to small caps. I also told you that I am excited to welcome the bears back.

Now, the skeptical ones among you would argue that smallcaps have wiped out their hard-earned gains and it's best to stay away from them.

Well, I beg to differ.

While I agree that many smallcap stocks, which are down more than 50% from their peaks, had no business being valued that much, the negative sentiment surrounding smallcaps in general has also brought excellent businesses down to never-before seen valuations!

While you may feel the pinch in the short-term, this can be a massive wealth creating opportunity for the long run.

Why am I so convinced?

Because this has happened before. And has been happening since the beginning.

As smallcap stocks don't enjoy the same amount of media and analyst coverage as their larger peers do, a lot of misinformation exists in the smallcap space.

This adds to the volatility of these already illiquid stocks as panic and misinformation spread quickly.

This means that negative sentiment in the space affects even good quality businesses. As bad stocks go down, good businesses go down with them. But the difference is that quality businesses come back up stronger.

Don't believe me?

Have a look at these charts:

Smallcaps Recovered Sharply After a 30% Crash In 2013

In 2013 also, as you can see in the above chart, the smallcap index had corrected by over 30% in just nine months from its peak. The panic also brought down the choicest of smallcaps to mouthwatering valuations. Once the panic subsided, however, the BSE Smallcap Index witnessed a turnaround and was up by over 120% in just one year.

What's Next for the Smallcap Index?

Coming back to the current situation, the BSE Smallcap Index is once again down 30% from its peak made in January. Fear and misinformation reigns supreme, and quality businesses are back to cheap valuations.

Of course, the future need not necessarily mirror the past, but I just want to drive home the point that this is not the first time smallcaps have fallen out of favour. History suggests that such sentimental corrections are followed by sharp recovery, and in my view this time will be no different.

Now this might bring a lot of questions to your mind. Like...

...How does one identify quality small caps?

What should one's exposure be?

How do I minimize the risk involved?

I do this for a living, and it's certainly not easy.

These are all the things I talk about right here on the Profit Hunter newsletter - so I hope you keep reading and I'll bring you new ideas everyday.

But you know I do more than that - I actually find the stocks and share them with my readers who have subscribed to my service, Hidden Treasure.

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

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!

So, of course I will keep traveling across the country, keep discovering the small companies that have great managements and wonderful futures.

But for today, I just want to remind you of one crucial point: Now is the best time to get into the beaten down smallcap space.

Warren Buffet's classic maxim comes into play here:

• "Be fearful when others are greedy and greedy when others are fearful."

With all the fear surrounding the smallcap space, now is the time to be greedy, and pick up quality stocks, which are down simply because of fear.

But that doesn't mean you should get carried away by greed. I'm not saying that the small cap carnage is over. No one can predict that. Anyone saying so is merely resorting to speculation.

But what I can say from my experience is that high-quality smallcaps will not only survive but thrive in the long term.

The recent crash only adds to the margin of safety - maximizing your return potential, while minimizing risk.

If a company's fundamentals and rationale to buy are intact it simply makes sense to buy, or hold if you have already bought.

Here is my suggestion to you for your long-term wealth building plan: Pick out the best small cap businesses at the dirt-cheap valuations that are available now, and sit tight for the long-term.

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

And, as always, you will hear from me soon.

Regards,


Richa Agarwal (Research Analyst)
Editor, Hidden Treasure

PS: If you are not already receiving Richa's list of recommendations for small cap buys, I urge you to sign up now. As she has noted - and as we well know - the best time to buy is when the market is bearing down. Click here to join Richa.