My personal portfolio comprises with an exception of maybe one, all companies with market cap well below 1000 Crores i.e. small caps. Its verily a roller coaster ride.
Its easy to make money in the markets but harder to retain them over long term.
In analysis of past 18 months over mistake made and what could be improved upon.. Net of losses in Vikas WSP, holding on, Zylog – booked loss, Cravatex – a minor position now, the other small caps like Atul Auto, Wim Plast, RS Software, Orbit Exports etc more than made up the loss.
What have I learnt:
#1 is that in a small cap portfolio, the diversification needs to be wider
#2 Once the environment/underlying hypothesis has changed, eg: RBI legislation on gold curbs is effective. Do not be brave, err on the side of cowardice, cut all positions, sell all jewellery stocks
#3 Stay hungry and change with the times
By # 3 I do not imply lowering your standards but stop doing what does not work. The best part about investing is the limit on losses to 100% of investment and no upper limit on profits.
That is only possible by being right and making fewer decisions. i.e. Holding for longer term. One simply cannot be right 50 times a year.
As you can see, with 3 out of 8 small caps misfiring, you may be correct in your assessment but if your temperament is to hold on to positions for ten years or longer many a spanner lie in wait for the compounding machine to break.
Small caps rarely qualify holding on. There was a time when leading debt free companies were growing at 30% per annum and available at 10 times earnings. Now leading companies are growing at 10-15% and available at 50-75 times earnings. eg; Dabur India, Nestle India, Colgate Palmolive India. Hardly a better alternative ?
A risk of leveraged financial institutions can be taken to get close to 20% compounding. All housing finance companies in India fall in this bracket.
Or alternate geographies where some leading companies are available at 10-20 times earnings. Reckitt Benckiser Bangladesh available for 300 Crores INR ( population adjusted value should be 9000 Crores INR if Bangladesh is to reach world average in next 15 years), Reckitt’s global market cap is 300,000 Crores INR. Bangladesh would be roughly 3% of world population in next 15 years.
GSK Bangladesh for 900 Crores INR (again 25 times undervalued on world average parameters), or Bata Bangladesh etc. look quite promising for buy-hold-and-retire type of investment. Just have a look at their balance sheets, overflowing with cash, needless to say zero debt. Just the kind that can sport 100%+ ROE. In IT speak they’re companies in Gartner Magic Quadrant with outstanding ability to execute with broadest vision.
My leaning has moved from small caps and focus is now on leaders available at mid cap valuations. Also I am encouraged by holding a concentrated portfolio which is more amenable to Global leaders. A different type of risk is assumed, country and currency.
Two quotes from Munger come to mind, not quotes verbatim but something on these lines “You are supremely rich if you hold shares of three best companies”. and
“You are adequately diversified if you have biggest mall, best restaurant and best grocery store in a town”. What begs an answer also is, would you buy a company that is successful and has a leadership status in one state of a country ? (eg: Thangamayil, Atul Auto), or a leadership in one country (eg: Dabur, Havells, Emami, TTK), or leadership in over 150 countries ? (eg: Colgate, Unilever, Reckitt, GSK), isn’t that an easy answer…
If you do not know the process of investment in Bangladesh, feel free to ask.
Disclosure: Vested interest in Bangladesh stocks mentioned.
EDIT: Unilever Nepal available at 2 times annual sales. Unilever India available at 5 times sales.
GSK India available at 6 times annual sales. GSK Bangladesh available at 1 times sale.
GSK Global is bigger than Unilever, both are no-brainers IMO.