Do it yourself

As I mentioned yesterday ( see here ) the pain being felt presently by the non-institutional investors is disproportionately high. For the investors and traders who have spent a short period of time in the market, mostly those who started investing in post Covid period, the pain may be actual, while for those who have been investing for a long time, the pain might only be notional due to perception of relative underperformance or loss of opportunity cost. Over exposure to small cap stocks While large caps account for ~60–63% of total and free-float market capitalization, retail participation in this segment has been relatively muted. Institutional investors—both domestic and foreign—continue to dominate ownership and trading activity in large caps. As a result, price discovery here has been more orderly, liquidity deeper, and drawdowns relatively contained. In contrast, non-institutional investors (retail investors, HNIs, family offices, and smaller proprietary books) have had di...

The benchmark Nifty50 has faced acute selling pressure around the 26000 level in the past two months. It has made several unsuccessful attempts to sustainably topple over this barrier. Nifty Midcap100 (benchmark for midcap stocks) has also shown a similar trend in the 60000-60500 range. Nifty Smallcap 100 (benchmark for smallcap stocks) has declined for the past two months. It is pertinent to note that in Indian context, a large cap company is defined as a company that falls within the top 100 companies in the country in terms of total market capitalization. At present, the companies with a total market capitalization in excess of appx Rs1060bn (~USD1.2bn) would qualify to be large cap companies. The companies with a market capitalization rank from 101 to 250 are termed as midcap companies. Presently, the companies with a total market capitalization between 343bn and Rs1060bn (US$375mn to US$1.2bn) are classified as midcap companies. All other companies are classified as small cap co...

  In the past few days, I have picked up many red flags that have further strengthened my conviction that the markets may be running far ahead of fundamentals. In my recent posts, I have pointed out how the market participants have been extrapolating events like ISRO Moon mission ( see here ). For example, the following three occurrences underline greed's dominance and gradually permeating irrationality in investment decision-making. 1.     Recently, one popular finfluencer tweeted a list of some small and micro-cap stocks highlighting that their market cap is less than their current order book. Many of these stocks witnessed heightened buying interest, apparently from small household investors, following the tweet. The message was fervently circulated on other social media, like WhatsApp. I received the message through at least nine forwards from different sources. All forwards appeared to endorse this seemingly manipulative message. No one on social media que...

Famous Spanish-American philosopher George Santayana famously said, “Those who do not remember the past are condemned to repeat it”. One of his less famous saying however was, “And those who do study the past are just as likely to make the same stupid mistake as those who do not”. The latter thought applies to the stock market participants more than the first; Even though the standard guidance to the market participants is that historical performance is no guarantee to the future performance; most of the analysis and behavior is usually based on extrapolation of the past trends. Analyzing the present consensus view of the analysts, strategists, investment managers and traders about the likely performance of Indian equities in short term (mostly next twelve months), I find that there is an unusually overwhelming consensus on the following trends: (a)    The small and midcap stocks may do significantly better than their large cap peers largely due to sharper earnings upgra...

The last weekend was unusually hectic for most participants. Friday evening, the market regulator issued fresh guidelines for asset allocation by the mutual fund schemes operational under the "multicap fund" category. The guidelines specify that these mutual fund schemes must allocate at least 25% of assets under management to each of large cap, mid cap and small cap category of stocks. SEBI also directed that the minimum equity allocation of these funds shall be 75% (presently 65%) at any given point in time. The mutual funds are required to comply by these directions in six months, i.e., by February 2021. SEBI further clarified that these guidelines have been issued further to the guidelines regarding categorization and rationalization of Mutual Fund Schemes issued in October 2017. It is pertinent to note that as per SEBI directions, top 100 listed companies in terms of market capitalization are categorized as Large Cap. Companies ranked 101 to 250 are categorized as Mi...

The history appears to be repeating itself for the n th time in the stock market. The small time traders, who normally join the band wagon right at the top of the market cycle, have once again jumped into the market arena. Completely overwhelmed by the left-out syndrome, they are queuing in hordes in front of the counters where they had lost their fortunes, not long ago. Many of these scrips are trading at a fraction of the price they were trading just six months ago. Some notorious stocks are topping the volumes charts. A strong urge to prove a point, rather than greed, appears to be the dominating factor here. Everyone wants to prove that it was their bad luck rather than lack of financial acumen, which caused them loss last time. I wish luck favours these traders this time. But in my heart I know for sure, this is not going to be the case. This reminds me of a very popular stock market story, which I think needs to be revisited. “Once upon a time in a village a man appea...

In my April review of investment strategy, I had emphasized that "the current crisis is unprecedented in the sense that it has seriously impacted the liquidity, solvency and viability of a large number of businesses, all at the same time. The number of businesses going out of business before this crisis ends would therefore be much larger than the crises faced by global economy in past 75 years since the end of WWII. The only way out of this crisis is to inflate a colossal bubble in asset prices, which is equally unprecedented." ( for full strategy review note see here and the presentation of "the big call" could be seen here ) Incidentally, the global markets have been behaving mostly like I have been anticipating. The central bankers world over continue to inject billions of dollars in new liquidity almost every day. Consequently, the asset and commodity prices are racing to pre COVID-19 period, despite there being definite signs of recessions in...

Couple of days ago, a friend forwarded the following chart which suggests that small cap stocks may be offering once in many year opportunity, as the value of small cap index compared to the Sensex has fallen to the point from where this index has rebounded sharply on each of the previous three occassions since 2003, when the BSE Small Cap Index was first launched. If the strategy notes for the year 2020 published by various market participants are any indication, a significant majority of the market participants appear inclined towards this view. Since some people have asked, I would like to share my view on this aspect. In my view, this is a purely academic exercise for three simple reasons: 1.     There is no mechanism whereby an investor can directly invest in a Smallcap Index. To my knowledge there is no ETF available on the Small Cap index. It is almost impossible for an investor to buy all 60 stocks in BSE Small Cap Index or 100 Stocks ...