Widely read:
At a time when the latest buzzword is 'small caps', we sat down with Samir Rachh, who has been managing the largest small-cap fund - Nippon India Small Cap - since inception. In this conversation, he provides his views on the current market situation and shares advice for mid-cap and small-cap investors. Here is an edited transcript of the interview.
Investors are upbeat owing to a massive rally in the mid- and small-cap segments and have added record flows into small-cap funds. Are we in a bubble?
The best time to buy stocks, especially the small caps, is when chips are down and there is blood on the street. In contrast, what we have today is the euphoria in the market. Going by our experience, this is the time to be fearful rather than greedy. Most big investing mistakes are made during the bull market when prices are going up fast, and one is in a hurry to buy the stocks with a left-out feeling. We are cautious at this stage.
With the markets at all-time highs, what can go wrong from here, particularly concerning the tricky segment of small-cap stocks? What are your views on this in the context of your fund?
Just that the markets are at an all-time high is not the reason for worry. Chances are very bright that the coming decade could be India's decade, and there are many companies and sectors where the upside might have just started. Overall, we feel there is a long-term bull market in India, but the same can also have sharp interim corrections.
The primary reason which worries us is that there is currently a rush to buy small caps, and, in the process, prices are shooting up too fast, and execution is becoming difficult. Today everybody seems to have realised that small caps are the way to financial nirvana, and usually, this kind of situation does not last very long.
We also have a significant political event coming up - the national elections - which is not too far, and it can also bring its own volatility.
Given your several years of experience navigating the small-cap space, what are the top three things you worry about the most when evaluating a small-cap stock you are unfamiliar with? In other words, which are the top three numbers which have worked the best for you as early-warning signals in the case of small businesses?
In small cap, by and large, what we follow is the buy-and-hold strategy with the long-term view in mind. Because you are getting into a long-term association with the company, quality of management and quality of business are the two most important things. Assessing these involves a lot of softer aspects.
How do you minimise the judgmental errors in assessing these softer aspects, and how do we institutionalise this process more and more is something that keeps us thinking all the time.
Small-cap investing is not just number investing. Numbers may just give you some lead or hint, but you will have to develop those hints by doing a lot of work. Also, many times, you will have to wait patiently till you are able to build a sizable position. Even after buying it, you may have to wait for many years till the full potential of the company is realised.
There are a few warning signals which one must be watchful of.
- Firstly, if the company is completely underperforming, compared to their own plans without any valid external reasons.
- Secondly, if the working capital shoots up beyond averages.
- Thirdly, if it's a family-based company, and the members of the family are not getting along well.
- Next, if there's too much churn in the top management.
- Lastly, if there's management resting on their past laurels.
Many investors are excited about mid- and small-cap investing these days. What do's and don'ts would you suggest?
Small-cap investing is a marathon and not a sprint. So come to this category with a long-term view. Small caps can be volatile on both sides. If something goes wrong economically, geopolitically, politically, or otherwise, small caps are generally first to fall and they fall fast. Therefore, maintain overall asset allocation discipline.
Invest only that much money in a small cap on which you can see a temporary fifty per cent sort of fall in value if something goes wrong without losing sleep.
Do book profits regularly if your goals are achieved. If you have allocated money to buy a house from your goal, you should not get greedy to finance even the furniture from the market. If you have allocated money for the marriage of your loved ones, don't get greedy to finance even the honeymoon from the market.
Click here to read the full interview.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
For grievances: [email protected]
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
