Are Small caps in a bubble? (Mar-2024 Update)

Here is a quick summary thread of our 5-Lens Framework to evaluate small caps where the attempt is to try and "identify the elephant"

Source: FundsIndia 2/n Let's evaluate Smallcaps using these 5 lenses:

1) Price Cycles (Long + Short)
2) Valuations
3) Flows & Sentiment
4) Earnings Growth Cycle
5) Past Returns

1/n Are Small caps in a bubble?

Here is a quick summary of our 5-Lens Framework to evaluate small Caps where the attempt is to try and "see the elephant" 2/n Let's evaluate Smallcaps using these 5 lenses

You had started investing your monthly savings into Indian equities convinced about the India long-term story & the benefits of automating your investments via SIP.

But now after two long years, your Equity SIP returns (Nifty 50) is a paltry 2%!

What should you do? If you weren’t aware, now is a good time to understand the inevitable “3 Painful Punches of Equity SIP Investing”.

They come in the form of 3 temporary painful phases in every Equity SIP Investor’s journey - more frequent during the initial years (read as first 5 yrs).

(2/n)

1/n Should you add Mid cap exposure to your long-term Equity SIPs?

Let's find out... 2/n A long-term Equity SIP usually works a lot better in categories where there is...

1) Higher short-term volatility &
2) Higher long-term return potential.

Is your portfolio well prepared for handling whatever this year has in store for us?

Here are seven simple steps you should take... Check 1: Do you have an emergency fund to tide you through emergency situations?

Make sure you maintain at least 6-12 months of your Monthly Expenses in a Safe Liquid Fund

Ever wondered what "Equities are Volatile" really meant?

Here is what the last 42 years, show us...

A quick thread... In Indian Equity Markets a 10-20% temporary correction is as common as your birthday - they happen almost every year!

Only 3 out of the last 42 years had an intra-year decline of less than 10%.

A lot of Large Cap Active Funds have underperformeded Passive Funds in the last few years.

This leads to the obvious question

Are passive funds a better and simpler way to play the large cap segment?

Here is a thread that takes you through the different nuances 1. Long Term View: It is difficult for large cap fund managers to provide meaningful outperformance over the long term

WHY?

1) Global Evidence
2) Higher Expense ratio
3) High Portfolio Overlap with Benchmark
4) Behavioral Challenges in periods of underperformance

Everyone talks about Asset Allocation. But no one tells you how to choose one.

Here is a thread on how to do it 👇 Reduce No of Decisions: Don't overcomplicate by debating 60% vs 62% vs 65%

Simplify into 5 levels

Risk Level 1: 10% Equity: 90% Debt
Risk Level 2: 30% Equity: 70% Debt
Risk Level 3: 50% Equity: 50% Debt
Risk Level 4: 70% Equity: 30% Debt
Risk Level 5: 90% Equity: 10% Debt

1/4
Thumb rule to understand Inflation: RULE of 2

In India, Inflation historically has been around 7%.
Boring Stat!

Here is what this really means -

Our COSTS DOUBLE EVERY 10 YEARS!

So if our money doubles in the next 10 years, we are still at square one! 2/4
The rough math for a 7% inflation implies prices will approximately go up by

1.4x or 40% up in the next 5 years
2x in the next 10 years
3x in the next 15 years
4x in the next 20 years

1) When we start with Asset Allocation, actually we are already underweight equities (less than 100%) based on the % of temporary falls we can tolerate. 2) This default underweight does not require identifying 'when' the market will crash. But should be based on expectation (derived from history) i.e 10-20% temporary decline almost every year and 50-60% temporary fall once every 7-10 years in equities.

Build a portfolio assuming we won't be able to predict and step out of future temporary declines.

1) Asset Allocation - Add Debt to reduce declines to a level that can be tolerated

2) Diversify via different investment styles (Quality, Value, Mid/Small, GARP, Global) 3) Rebalance Annually if equity exposure deviates +-5%

4) For large lumpsum inflows - Stagger via Time or Valuations

5) Automate monthly investments via SIP

A superb recent performance may sometimes mask dangerous risk-taking. A dismal recent performance may sometimes mask a solid investment process and good long term track record. Differentiating both is unfortunately more art than science.

A thread on how to address this... 1) Consider full market cycle performance from peak to peak or bottom to bottom.

2) Check how did the performance occur - huge sector calls, concentration, mid & small cap exposure etc

3) Check downside capture ratio and declines vs benchmark in all major falls

1) The real challenge in a bear market is that at some point, you will get fooled thinking, you should have seen the decline coming.

Then comes a stage when you think the markets will go down but don't act and it actually goes down.

This is where the mind games begin. 2) You predicted the market would fall. It fell exactly as you predicted!

If only you had listened. Regret takes over.

Looks like the market will fall again. History shows no one can predict. But f**k history. You predicted the fall.

You utter the most dangerous words...

The policy response to the current crisis is unprecedented in its speed and magnitude. As a result, we have asset reflation in warp speed.

You can read the key takeaways from the recent Bridgewater note in the below thread..

bridgewater.com/research-and-i… 1) What took three years and seven months in the Great Depression took one year and six months in 2008, and only one month in the current crisis!

Here is a thread on evaluating Gilt funds:

For a detailed version visit:
fundsindia.com/blog/mf-resear…

It all starts with the simple question:

Is this the time to buy Gilt Funds?

Let us find the answer using different vantage points from 6 eccentric folks.. Here is a thread on evaluating Gilt funds:

For a detailed version visit:
fundsindia.com/blog/mf-resear…

It all starts with the simple question:

Is this the time to buy Gilt Funds?

Let us find the answer using different vantage points from 6 eccentric folks..

Some learnings from past few months:

1) Handling bear markets finally boils down to psychology
2) Having a pre-defined what if things go wrong plan (when to invest + how much to invest + where to invest) creates the much needed 'feeling of control' 3) Having some debt allocation which can be moved to equities partially at lower levels - can help you change your frame of reference - you are suddenly waiting for the markets to fall to your pre determined levels
4) This is illogical as your remaining amount is down but works!

1. One of the biggest issues in equity investing in India, is that most of us are anchored to the 15%+ returns. 2. The moment short term returns are lower or negative, we guess something is broken and panic out of the markets..