The crowd psyche has excessive predisposition towards growth, more so if it is accompanied by consistency. Our personal leanings on any scenario that we refuse to appreciate have little to do with investing success. That is why the quote “Don’t argue with the tape” or “Market is always right”. For example I don’t like a 20% growing company at 40+ trailing PE no matter what the organisation or who runs it, no matter how seductive the growth prospects. This mindset has helped me more often than not. I never became a victim to private sector Insurance mania, satellite TV (Dish TV), micro finance etc.
However, market gives two hoots about my opinion. Market will pay heady multiple for growth oriented stocks no matter what the downside. That is dangerous for small cap investor, as some small caps may never recover. Being greedy, I follow the Lynch maxim, Big Stocks small moves, Small Stocks big moves. Big moves can be in either direction !
As a micro cap investor you have to be vigilant to avoid big move on the downside, or one could lose 70% or more on paper very quickly. 30% volatility in micro caps is similar to 10% volatility in big cap, don’t even think of stop losses.
The mistake I make often is to wait too long for a stock to get cheap, something I may not learn, but this has helped me more than otherwise in toto. I want to share a story on two stocks. One of them that I missed was Spice Mobiles in early 2010 around 20-30 Rs. I wrote briefly about it on theequitydesk.com here when the price was around 50 Rs. At the time Spice Mobiles was a 100 Crore entity in 1 Lac Crore market of handsets. It was not merged and name of company was Spice Mobiles Ltd.Stock went to 150 Rs over next 6 months.
Second mistake was with Orbit Exports, I recognised it at 15 Rs with A class management and a niche with excellent clients in US but did not buy it. Since I keep looking at downside more than upside, with each rise my aversion grows. I think it has steam left but I don’t buy if in my world view downside is disturbingly high.
Aim for achievable, Show me the Money
Contrary to what the general perception may be I am not looking for 10 or 20 bagger or 50 bagger, that is pure serendipity. I welcome if they so turn out to be. I am just looking for a simple 5 bagger in 4-5 years, that is not at all bad if you compute the compounding.
A five bagger in five years translates to a 25 bagger in 10 years and 625 bagger in 20 Years with a much higher probablity than investing in blue chips like IDFC Ltd and holding them for my grandchildren. Since nobody can look that far into future of any enterprise it pays to be medium term oriented and straining your mind only with what your regular corrective vision glasses render, over reliance on telescopes can injure investing performance.
As a rule I don’t buy hope and hype, dreams of prosperity, bright future prospects or any new and improved industry. I believe in my company showing me the money, here and now.
Disclosure: Not invested in either of two