Too Much Money Chasing Too Many Small Stocks
₹400 crore to ₹40,000 crore today. That’s a cool 100x. If that’s the promise the small-cap space generally holds, count me in too! But the fact is that the small-cap space is littered with companies that held a lot of promise but never made it.
It’s also full of stories of many an investor going all in only to find out that they have been caught in a bad stock. As much as I have heard about people making it big with small-cap stocks, I have heard, perhaps even more, of investors who have got stuck with terrible investments. In spite of that there’s extreme interest in small caps.
And not without reason. Take a look at this table: The BSE Smallcap Index multiplied over 25 times over a 20-year period. Over 10-years, it multiplied money 6.3 times.
However, between 2003 and 2013 period, which is a 10 year period, the BSE Sensex outperformed the BSE Smallcap. In general, over very long periods of time, it will be fair to say that the BSE Smallcap Index has done better than the BSE Sensex. So, naturally there’s a case to be made for small-cap stocks.
But where it gets complicated, or perhaps treacherous is a better word here, is when it boils down to individual stock picks. With large-cap/blue-chip stocks, there is almost always a lot more information and good quality research available. So, in that sense the scope for a fundamental surprise is limited.
Another other advantage is that you can often be forgiven for buying good quality stocks at the wrong time. Over time, such companies deliver on fundamentals, and the stock prices sooner or later catch up. Usually, such companies pay dividends as well.
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