Will Small Caps See an 80% Crash? - Profit Hunter by Equitymaster
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Will Small Caps See an 80% Crash?

Oct 10, 2018

Richa Agarwal, Research analyst

Many are calling the IL&FS debacle India's Lehman Brothers moment.

A news report points out that crisis ridden IL&FS may require impairment of around Rs 150 billion in loans and equity in its subsidiaries - for now.

But the cat is not completely out of the bag yet, and it may get uglier.

Its newly appointed board is slowly discovering this unpleasant fact. Uday Kotak, chairman of the board, described IL&FS as an extremely complex corporate with 348 entities that are part of the group. The initial estimate was 169.

Considering IL&FS has a debt pile of over Rs 900 billion, the potential for further bad news rolling out of the runaway IL&FS train remains quite high.

All this and other recent bad news has not gone well with stocks. Especially small cap stocks.

It has served to deepen the fall that started in Jan of this year:

What's next?

After such a large fall, are things bottoming?

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What does history say about a fall of this magnitude?

Well, if you're going to look at price movements of stocks for cues, the news is not good. Since we referred to Lehman Brothers, what happened at the time it went bust?

Here, have a look:

That's right! From January of 2008, the BSE Small Cap index crashed 80%!

But does that mean that you should wait and that small caps will fall that much again before they rise?

Well, not really. In fact, the last time they fell that much, they saw a rapid rise over the next few months creating massive wealth for many investors:


There's absolutely no telling where the markets will go!

So for you as a stock investor, what is the answer?

The answer: Stock prices are a mirage. Stop chasing them before you lose both your mind and your wallet.

What must you do then?

Like I wrote to you earlier, chase business values instead.

That is, get a fix on company's worth. Do your homework. Research each business and its industry space well. Talk to its management. Get a fix on what the business' future is going to be. Estimate what it conservatively worth.

And then buy it only when the stock market offers it to you at a discount to that worth.

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Why do this?

Because while stock prices tend to bounce around so much they almost take on a mirage like quality of there today gone tomorrow, the value of a fundamentally strong business seldom disappears into thin air. In fact, it steadily grows over time.

Thus, it makes sense to base your decision on a business' value rather than its stock price. Do this, and you'll love markets such as these. Because it is only when stock prices start falling that you get to buy such businesses at discount prices.

And if the market falls further? All the better! You get to buy more of the stocks of the most attractive businesses at even lower prices!

Sooner or later... by hook or by crook... the stock will come running back to catch up with its value.

And leave you laughing all the way to the bank.

Happy Investing,

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

PS: Do not be afraid to buy stocks right now - if you pick the right stocks today, it will have a lasting impact on your wealth. I cannot stress this enough - buy today! Sign up for Richa's recommendations ASAP!

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1 Responses to "Will Small Caps See an 80% Crash?"

Ranjith

Oct 10, 2018

Dear Richa, Good to know about the past and it gives some confident even thought the current market situation is negative. However, One question, for the investors who are holding the stocks with higher price those bought before this market crash with higher price compared to the current market price, example if it falls 80% further from here and recover 100% from bottom in few years then the stock prices will still either less than they bought or the same price as they bought (close to). In such case we are going to hold the capital for long, in this scenario, are you suggesting to sell the stocks now and wait, buy if it falls further down or buy when market settles down ? please advice. thanks

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