Historically, many investors increase investments in rising markets, and withdraw them when markets are falling. Returns for such investors are often lower than investment returns.
The front line index (Nifty 50) fails to capture the extent of draw-down in broader markets. Nifty is down just c9% from its all-time-high, but more than two-thirds of all stocks that are currently trading have more than halved, and more than a third have fallen in excess of 70%.
Instead, we choose to focus on the BSE-Small Cap index. It is 854-stock index with INR2 trillion (20 lac crores) in market-capitalization and no sector represents more than 11% weight. Contrast this to other front line indices, where financials dominate; and when combined with consumers and technology sector, they account for more than two-third of the index—very lop-sided for the purpose of a broader analysis.
As of yesterday’s close, the BSE-Small Cap index was down close to 35% from its all-time-high (reached in January 2018); the fourth time it has happened since the start of this century. They say that history seldom repeats itself, but it certainly rhymes. A look at previous instances throws-up interesting results.
The BSE-Small Cap index had fallen more than 35% in 2004, 2008 and in 2010 before the rout that extends today. Now, it is certainly possible that a business that one thinks is mispriced today, would not immediately revert to fair valuation tomorrow itself. If could continue to trend down despite being undervalued based on several extraneous factors.
Nevertheless, that does not mean we cannot formulate an investment strategy around it. In each of the three instances that we mentioned above, if one had started systematically investing a constant sum each month from the first time the index hit a 35% draw-down, one would have ended up generating between 18% to 39% CAGR over the next three years; truly superlative returns. This is despite the fact that in the 2008-09 global financial crises, the index, having fallen 35%, fell another 68% over the next fourteen months; and yet, if one had continued the SIP through the fall, one would have generated 18% CAGR over a three year horizon.
The same study, when extrapolated over a seven-year SIP time-frame yields between 13% to 17.5% CAGR, again a stellar performance over a longer-time frame.
Today, a large majority of the interesting businesses are available at below what we believe is their fair value and we think the time is right to systematically increase allocation to such businesses. Buoyant’s portfolio is now firmly tilted (70% of investments) towards what SEBI classifies as small and mid-cap companies.
Howard Marks puts it succinctly, “the refusal to catch a falling knife is a rationalization for inaction. It’s our job to catch falling knives. That’s how you get bargains!”.
Information in this blogpost is not intended to be, nor should it be construed as investment, tax or legal advice, or an offer to sell, or a solicitation of any offer to make investments with Buoyant Capital. Prospective investors should rely solely on Disclosure Document filed with SEBI.
Any description involving investment examples, statistical analysis or investment strategies are provided for illustration purposes only – and will not apply in all situations and may be changed at the discretion of principal officer. Buoyant Capital may have/have had holdings in the stocks at mentioned in this blogpost at different points in time.
Certain information has been provided and/or based on third-party sources and although believed to be reliable, has not been independently verified; the investment managers make no express warranty as to its completeness or accuracy, nor can it accept responsibility for errors appearing herein