Ongoing correction in mid and small cap, what to do?

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This year small & mid caps are witnessing good amount of correction. This is not a normal correction but a deeper one as there have been multiple rounds of mini corrections within this phase. The euphoria of small investors has vanished as they get depressed with huge losses, especially those who made fresh entry in Jan’18 are finding it hard to digest. In this article, we share our thoughts & views on how to handle such deep corrections.

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Stock market moves in cycles

You have heard of bull and bear. They both co-exist in stock market system. Unfortunately, our human behavior is such that we forget one of them when other one is in action. This happens in bull as well as bear market. Back in 2016 & 2017, investors received handsome returns. Our own portfolio service (MultiCAP Multibagger) made approx 61% returns in calendar year 2017.  There was a noise that market is expensive but this noise was there since 2015 end. So by 2017, mostly people were dancing & celebrating while bear made a quite entry in those unguarded times. All those who did not book profit or made fresh investment in Jan’18 were caught surprised to see bear everywhere. Trapped in successive lower circuits and fear of booking losses, they are stuck. Fast forward to Jun’18, five hard months have passed but bears are relentless. Most people have their portfolio resembling to the start of bull market. This has impacted everyone’s portfolio right from established player like Motilal Oswal, to famous TV personalities like Porinju to common investors on the Dalal street. Even we are not spared, our Jan, April & May stock picks have been hammered by the ongoing correction. Despite some of our stocks registering 5 times jump in net profit, they have lost 30-40% of their stock value. Reason is panic selling by investors. In small caps, this gets more pronounced since there are lesser institutions and more of retail investors who are prone to emotional panics. Small caps also have lesser liquidity in terms of average shares being traded in a day. For example, if a stock has a liquidity of few thousand shares as a daily average. Now, if anyone puts few lakh shares for selling, it is bound to get locked in lower circuit for weeks. This has a domino effect and other people also start to sell. This is a reason big investors avoid investment into less liquid stocks as entry & exit both are difficult.

So don’t feel alone, nobody can time or correctly predict when bear will appear on the street as they usually comes when everyone is high on success.

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However, for every bull market, there is a bear waiting and similarly for every bear market, there is a bull waiting to charge. So wait for bulls to appear back on the street and your returns will be fine. Do not leave stock market now during a bear phase as you know bulls are waiting. Despite knowing this fact, sadly many investors still leave stock market during the bear phase and wash off their hands for rest of the life. This is why we have so many people having bad stories about stock market and blatantly labeling it as a gamble.

Usually every bull market places sensex to a new high while bear pulls it down by only a portion. So over long term sensex or equities seem to move only in one direction, that is up. The important step for you is to weed out poor stocks which were bought without any analysis. For quality stocks where your investment theory hold true, stock price jump is a just a matter of time. However nobody can time the market, it may be within 2018 or even after 2019 election results.

Long term Average for stock market is 14% CAGR

The biggest folly of investment world is these four letters – “This time it’s different”. Sensex rallied by almost 28% in calendar year 2017. This rally was coming all the way from 2015. While long term average sensex return is close to 14%, this means there was a correction round the corner as law of average was challengedEventually, law of average caught up. For now it seems sensex may close around level of 35-37k by Dec 2018 averaging out last two years returns back to 14-16% CAGR. In such cases, only few stocks will rally up while most stocks will remain at same or lower levels, resulting in selective rally. So, stock selection has to be the key for making money in 2018. It is also possible that we are proven wrong by end of this year. We are not astrologers and never try to predict the future. All we are trying to say is based on the laws of average & probable outcomes. Reality may be different. Possibilities can be safely assumed for future and not guarantees.

So what to do?

Now, we are trying to put ourselves into the shoes of common but Ace reader of AI post who thinks rationally.

“I know there will be a bull market once this is over and it will be volatile till then. I know I have made losses in many mid and small caps. I know I have made some terrible stock investments purely due to fear of missing out on big returns which everyone seemed to have in 2017. I know that the biggest edge I have is controlling my fears and walking against the market. Also, I am also a reader of AI post and need to check logic in my investment.

If I think of all this, my answer should be:

I have only control of my investments, I can not control which way market will move in short term. But over long term, I know that bulls are always somewhere round the corner. I will be quitting all junk stocks since no point in tracking junks. Let me re-assess my investment theory in stock that I consider quality. Are earnings picking up? Is company moving in right direction? If answer is yes, then I don’t care which way stock price is moving at the moment. Bears will collapse everything on their way but eventually quality will rise back from ashes like Phoenix. I will not try to catch a falling knife by buying at every dips rather I will wisely use my money to increase stakes when a bottom is relatively stable. This will be done only after re-assessment of quality stocks. Rest I will leave on bulls and let’s see who is smiling in a few years from now.

To have such a mind-set, it is imperative that you invest in stock market with money which is not required for several years. This is a game best played over long term, so short term money will not give you a competitive edge.

@ AI, we constantly try to improve ourselves in order to provide best recommendations to our clients. Even this 10 bagger journey was not easy as there was a period of one and half years where the stock went nowhere (Jun’16 to Nov’17). We have been recommending some beautiful future multibagger stories to our clients believing they will come alive with time if not in short term.

Hope you benefited from this article in bear situations like today. If you like this article, please feel free to share using sharing buttons at the bottom of this page.

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