Forget Bull/ Bear Market – Focus Only On Specific Stocks:
When taking a position, do bottom-up stock picking. It doesn’t matter if it is a bull market or bear market. Pick companies which are expected to outperform the segment and the market.
The selection criterion is simple:
– Look for managements that are stable and can perform over a period of time.
– Look for interesting business ideas with growth potential.
Always think long-term, especially in mid and micro-cap stocks:
Mid-cap and micro-cap funds/ stocks are products for long-term investing. The minute you get into mid-cap or micro-cap stocks, you have to be a long-term investor. Investors should not look at the past one year’s returns and get in or out. In the very short run, these funds/ stocks can be extremely volatile and can lose more value. The relative valuation between large-caps and micro-caps is not offering a high margin of safety.
Over five years, micro-caps are not a problem even if you are buying at the top end of the valuation.
Don’t worry if earnings visibility is not there for a few quarters:
If we can find a decent management in a business that we are confident will grow over time, we are happy to own these companies, and if their stocks prices come down, we are happy to buy more. The true value of the business gets built up over that holding period.
If you think in terms of quarters, you will start making mistakes.
Don’t worry about global events like the Chinese Yuan devaluation, US interest rate hike etc:
Most people analyse these global problems on hindsight and start getting really scared. Let’s look at the earlier global problems: 2008 was the worst, but in around nine months the market had recovered to pre-crash levels; in 2013 it took three months to recover.
A month ago, investors were asking if I would like to buy in case of a correction. Corrections have reasons; this time it is a global reason. Now that you see the correction, you don’t invest because all the new data points scare you. Six months later, when the market has forgotten this event and is rising, you will get in at a point that is higher than even today.
These global events keep coming. If you are a long-term guy, you should be happy about corrections.
Hold on to favourite stocks forever:
In the DSP BlackRock Micro Cap Fund, much of the top holding has not changed. Indoco remedies or SRF has been there for long. We are actually happy to add into the same names if the prices fall.
Bajaj Finance, a company that we would have loved to hold forever, saw a dramatic rise in its market capitalisation to around Rs 25,000 crore. We bought it as a micro-cap and now it is a large-cap.
Top Holdings of DSP BlackRock Micro Cap Fund(Aug 31, 15)
|Eveready Ind||Cons NonDurable||67.77||3.24|
The earnings cycle is about to improve. So, be happy if the markets fall now and buy more of your favourite stocks:
The earnings can swing from 7 percent to 16 percent in a year. It is a matter of time. A lot of pain has already been felt by the commodities segment. The earnings is what the market finally needs. If the market falls now, it is good. It is falling at a time when the earnings cycle is better in the next three years. That makes valuations cheaper and equities will perform better.