What we're seeing in small caps and mid caps - broad decline and lack of momentum - is natural in the rotation cycle. If your companies continue to grow earnings, they'll be back and beyond in a few quarters. If not, you picked lemons. No amount of narrative can change this.
This is usually the time when investors start to doubt the narrative they believed so far. Pain of loss hurts a lot more than pleasure of profit. It's scientifically proven. It's difficult to believe "sector has tailwinds" when your own money is disappearing before your eyes.
It's easy to imagine a future where you're just minting money punting on stocks (I did too). Many would contemplate leaving their jobs. And now there's that knot in the pit of your stomach. Or maybe I'm too early? Another 20% down should definitely trigger it.
It's not all bleak though. Unless you're buying completely manipulated stocks, or stocks who have had a good run in the last few quarters for temporary reasons, earnings growth will ultimately prevail. But it is for you to decide whether that growth is likely or an apparition.
People say Infosys, ITC, HDFC Bank etc were small caps at one time. This is really difficult to visualize, so just consider all current mid caps as erstwhile small caps. Much easier to visualize Deepak Nitrite as a small cap, isn't it? Ultimately this is what you are playing for.
Not everything rises linearly like Deepak Nitrite. Valiant Organics exhibited a 'step' pattern, it would jump 30-40% in a few days and then spend 6-9 months on pause, then repeat the same. I have no clue why, and why should I care? HODL karo (conceptually, not a reccommendation).
Garware Technical Fibres exhibits a similar but less defined pattern. It's chart looks vertical now due to PE expansion, but it wasn't in early 2020, and it was still up 500% over 4 years. Hindsight main sab badiya hai, but while it is happening you will often have no clue!
Self-control is critical, because there's always a better narrative on some other company. With democratization of information and everyone peddling recycled annual reports and quarterly presentations, there will ALWAYS be something else to shift your money into.
Anyone ever asked themselves what edge they have if everyone has access to the same information? As markets become more efficient due to removal of information asymmetry, what is your edge? Perhaps independent decision-making and self-control are your only possible advantages.
Last words - you cannot avoid losing some money while investing into small caps or mid caps. Some of that loss will be permanent, some temporary. Everyone who has entered and remained in this space has learnt the lessons, you just need to ensure that lesson isn't fatal.
And no, fatal doesn't necessarily mean bankruptcy or financial ruin. For many people, just the unpleasant experience of a draw-down can be so off-putting that they give up the space entirely. That's also a fatality.
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