ValuePickr Forum

A Brief summary of the Micro/Small/Midcap Carnage

So I have always been asking myself the question - do you hold a GREAT company when:

  1. Valuations get ahead of itself
  2. There are some headwinds
    and see through the difficult time or take the risk of reinvestment and move into another stock
    If one looks at Buffetts portfolio, the top holdings such as Amex and Coke have largely remain unchanged for decades. Its not like he hasnt seen valuations getting ahead of itself or pressure on earnings in the near term. Key question is can you trust yourself to exit at the right time and if you do, deploy the money in a better name?

If I look back to the time when Ajanta was quoting at 45 times trailing earnings, do I regret not selling? Yes I do. But there is no way of knowing whether valuations will continue to remain that way or go to 18 times like it did. Even if you know it is inevitable - how do you know it will not go to 60 times before it goes to 18?

Even today, while management is itself talking about de-growth in Africa institutional business, I feel it doesn’t stop it from being an amazing company. Even this year when earnings have dropped gross margin has still increased by 200 bps! It has done so every year for the last 10 years! So it is seeing some headwinds, but the business is only getting purged. Ultimately the poor quality institutional sale will only be replaced with higher quality branded business. It might just have a year of weak earnings in the middle. Is that good enough to sell? I really dont know!

In fact I am exactly where I am with P&G where I was with Ajanta a few months back. Do I want to continue to own a great franchise like P&G with an impregnable (and I mean a mind-blowing one) moat at 80 times trailing earnings with a long runway but only a 10 odd % earnings growth. Or do I ride out the inevitable correction and add more when it dips to the right valuation? Who knows whether it will continue to remain at 80 times earnings or drop to 40 or go to 100 (irrational as it may seem)? What if it doesnt drop and the business continues to grow? Do I want to take that chance - I really dont know!

Views invited ofcourse!


Let me share some of my experiences in handling this situation (not very successfully though).Few key things to watch out:

  1. Growth slowdown- Ajanta / Page which was 2 years back.Page picked up again but sold out
  2. Industry under stress -Pharma-inevitably it would affect all players when the leader was down (Sun Pharma)
  3. Overall market set up/ valuation of small and mid cap/ excessive profits made by all participants/ experts coming on TV giving daily Gyan etc
  4. Most importantly - Small and Mid caps are most vulnerable to this type of corrections.On top if results or Corp Governance issues-more beating.
    People may generally comment that if you have conviction-hold on but when skin is in the game with no hope, eventually you will give up.Even management does not know when it will turn around.
    These are the systemic risk in investing.Personally I have shifted to large caps after getting some beating in mid caps.I am not chasing big returns anymore.
1 Like

This carnage is all about liquidity in mid and small caps. Many stocks that I track have good earnings visibility but no buyer. Volumes have fallen drastically. Look at ICICI Bank/Axis bank, the governance is worse than any mid cap stocks that I hold but everyone is waiting to buy as soon as CEO is kicked out. The volatility is definitely a factor that increases risk perception.

I will also add a point here, smaller companies are prone to arm twisting for favours/money laundering by authorities/politicians in lieu of approvals etc particularly seen in real estate, metal and mining companies and other cash intensive biz.

Another point is that fund managers are very much aware of corp governance lapses in large caps but they remain silent since they know the promoter will ‘manage’ the environment and media. Most of the large conglomerates have dedicated media team which helps scrub the negative mentions in the media. Smaller companies do not have those means nor scale to fend off malicious campaigns/bear attacks.

Good midcaps and small caps will bounce back eventually if earnings remain intact. The pain is enormous for sure but have seen the worst in 2008. At least I am not expecting earning collapse like in 2008-09.


My two cents.

This is a good opportunity for introspection and taking corrective measures as most of my assumptions/greed on market direction have gone wrong. There were incidents where investments were based solely on stock-tips on social media, nice articles on leading dailies/brokerage firms. Now after tasting the experience, develop a discipline of not selecting stocks with short cuts. Time to read/re-read books from Investment Gurus, rejig the portfolio by showing the door to low-conviction(i.e.bad financials, balance sheet and no-visibility on future of the products) stocks and investing the obtained sum in high-conviction businesses. It is easier said than done.

I plan to hold my portfolio with minor rejig but buying fresh will be only after a few months as I foresee the correction or dull period continuing after a multi-year rally post 2013. Meanwhile, park the cash in debt instruments or value-investment based multi-cap funds(to avoid capital erosion) where volatility is very low. Two scenarios to anticipate: 1. Market recovers and upward trend starts soon, in this case one might have missed the opportunity to buy at low but the existing portfolio should recover. 2. Correction continues further for a few months, then one can redeem the capital invested in debt funds/low-volatile mutual funds and buy more of main portfolio businesses provided their valuations are very attractive. We don’t know the depth of market correction. There would be a period of anxiety, restlessness while watching the screen, in this period, but its the time for testing our patience.

Selling the small/mid/micro-cap and buying the defensive FMCG large caps may sound like a good idea but who knows if they too correct tomorrow then there would be double-wammy.

Note: This is my personal view.


Among the emerging markets Sensex was down by ~10% from the bull market high, but the same is recovered and now standing at -2%. Whereas the rest of the emerging market is corrected over 20%.


Since all the crowd is now moving from Small/Midcap to Largecap, Largecap escaped the correction which started from 29-Jan and pulled back from 23-Mar. IMHO, the current rally in the largecap is being driven by this crowd. So the question is, how wise it is to move to Largecaps which is clearly due for correction?


I am of the strong opinion that every outcome should have some learning associated to it.
An event without any lessons learnt never makes anyone wise and makes human prone to errors in the similar event in the future.

Coming back to the “carnage” topic, please refer to the screenshot below:

This assumes that equity/debt allocation is 60/40. You can tweak it based on your own required numbers.

The most interesting part, "Lessons Learnt"

1. Correct Asset Allocation - Debt to Equity
There is a reason why Capital Allocation Framework thread by @Donald is in the hall of fame on VP. Its focus is more on allocation within the equity domain but the learning can be expanded to the entire portfolio of an individual.

  • Assuming total wipe out of mid cap portfolio, the net worth decreased by 30%. I am 100% sure that no VP’er or anyone in India would come in this extreme category. Substantial amount, but still nothing to worry. With learning and time in hand, this can be recovered.

  • Let’s say the mid cap portfolio dropped by 40% to 50%. Assume that this is the range where majority of the investors fall. This is also difficult to believe unless luck was entirely against you and all the mid cap investments were in vakrangee, PCJ, Manpasand, STPL, etc. This drops the entire net worth by 10% - 15%.
    This means that even though there was a carnage in the mid and small cap space, but there was no carnage in the individuals net worth if the allocation was correct.

  • Mind you that this entire loss projection is for those who had invested in these mid caps in the last few months at entire tops, those invested 18-24 months ago might not be sitting at a loss, they might be having their notional gains wiped out, that’s it.

2. Correct Asset Allocation - Within Equity

  • If my entire portfolio is in mid caps, it is totally my mistake and not of PMS fund managers, twitter, VP community, etc. We should own it up and take it at face value. In this case, we should introspect what caused it, most likely it would be greed and fear of missing out. Time to correct that.

  • Have some solid companies in the portfolio, enough said on this by VP “Top Contributors” and “Experts”. These are the shock absorbers of our vehicle called investments. Learn from other experts, if there is a very popular thread like “Blue chip 10” by our own internal expert @Yogesh_s, there would be a reason for this.

3. Don’t mimic experts blindly

People are still more interested in the “what” part rather than learning “how” and “why” part. If you look at the @hitesh2710 portfolio thread, still we can see that he is being asked one liner questions on what is his portfolio, his recent purchases, etc. Nothing wrong in that, but this does not solve our purpose. The reason why he bought and the learning which we can take away from that purchase and apply it next time on our screener is what would benefit us collectively.

4. Compounding the knowledge

  • Next one year till elections is going to be range bound, this is what we have been hearing from multiple sources. Why not spend this time in reading Dorsey, Fisher, Graham, etc. Become capable and self sufficient enough. If not to generate alpha, then at least to do some basic screening and apply those principles in practice. More on this in the next point.

5. Self and portfolio evaluation

This in my opinion is the most important and critical aspect. Evaluate how our portfolio has performed in last 5 years or 3 years at least. Compare that with sensex, mid cap index, etc. to correctly benchmark. Following scenarios might emerge:

  • Portfolio <= Sensex
    Deep introspection needed if we have not outperformed in this bull market.
    Can we put aside our ego for some time and start moving our funds to a well diversified mutual fund until we learn accouting, valuations, Mr Market, moats, Porter’s 5 forces and all those equity industry buzzwords. Mind you, they don’t guarantee success, more on this in the next point.

  • Outperformed index by 2%-3%
    You have read all investment books, blogs, VP hall of fame threads, investment philosophy, etc. but are outperforming index by just say 3%. I know I can get severe beating here and folks might say 3% alpha in 30 years makes a huge difference. I am not denying that. Only thing I am saying is just evaluate your investment style and checklist and work on that consistently.

    It might be that we have read all the books but did not undestand completely.
    We might have understood all the concepts in theory but failed while applying.
    We followed some investment philosophy which is against our style and behavior.
    We became very good with stock picking but did not undestand when to sell.
    We buckle down under the pressure of greed and fear and make silly mistakes.

    The reasons can be any, only the one who does self evaluation honestly would be able to get the answers.

The same alpha can be generated by focusing more on career, learning new skills, attending conferences in our domain area, getting good pay hikes. Many people with no idea on who Charlie Munger and Aswath Damodaran are might be generating better returns by having consistent returns, investible surplus for a very long duration. You never know.

6. Know your style

Time to know your style. Every style with proven methodology generates market beating returns.

  • Consider an investor who knows the cycles and invests only in sugar sector once in 5-6 years. No trades in between. With basket approach and even without catching exact top and bottom, that person might be doing much better than 95% of the whole investing community. Very rare to find and very risky, but there might be people doing this, we can never deny.

  • Your core portfolio is not doing very well but your trading returns are very good even though small because of less initial capital. Why not focus on that and explore that vast ocean. This “trading can make you money and fundamental analysis might give you financial independence” is not cast in stone. Only 1 in 1000 would attain financial independence even from fundamental analysis. See, the odds are so much against us even in this. So if business analysis is not what interests you from the heart, why shouldn’t we try other things. I know another controversial topic which can open a can of worms for me :slight_smile:

    Identifying self style “that works” is really important. Otherwise, any amateur with advent of technology is capable enough to run Peter Lynch or Ben Graham screens on screener.

Remember that whether it is life or a competitive exam like CAT/IIT, etc. The syllabus remains the same. Those who top are not better in technical knowledge over others. But they know how and when to apply those skills in the situations that matter and demands from us.

After reading my entire post again, I could not find anything which I or you might not be knowing. But it is all about implementing.
Remember that the simplest things in life are the toughest to do.


To start with I have more or less remained invested completely in equities for last 4/5 years and have had little cash exposure. I have generally remained invested in smallcap/midcaps and continue to do so, what I have done is swapping of stocks. These are my views and to some extent this is what I have done:

a) If you are investing in small & micro caps a 20% to 30% drawdown every year or two is a given, this is norm and not an exception.
b) Have absolutely no price anchoring. This is actually a great time to get out of weaker stocks despite the fall since a lot of good quality stocks have also fallen significantly and it is a good time to swap.
c) Dont use P/E or P/B to justify buys. Look at good mgmts, good compounders available at decent valuations. These might still not be cheap compared to what you own but a 20% drawdown can be easily covered in a year by a 20% growth.
d) Dont be in a hurry in buying the fallen angels(?), most of the falls happen because of funds exiting the midcaps owing to mgmt issues, retail has little role and funds dont enter back in a hurry (funds are sheep and anyone taking a varied position will owe a lot of explanation). Dont worry if the fall is due to a perception or reality, the stock will give enough opportunities to enter.
e) It is a great time to move out of business where cycle has gone bad or can go bad or there are headwinds. Two clear examples are sugar and aviation. Even without a broader market correction these stocks would have corrected to the levels they have give or take few percent points.
f) Make sure when you swap you end up getting into something of higher quality both in terms of business and management. Also do see that you have enough visibility both short term (a year) and long term (3 to 5 years). Dont get carried away by 5/10 year stories.
g) Incase you own compounders with good mgmt and if they have fallen just revisit your thesis and see if it holds and carry on. There is nothing to worry.


A lot of midcap/smallcap stocks are undergoing significant volatility compression. Volatility may soon expand and stocks may shoot or plunge, as per fundamentals.

Kwality Ltd is another one that can added to this list. The reasons i see are following

  1. Decreased Earnings.
  2. Pledging of shares by Promoter.

I was of the view that a business like Diary would not fail eventually but then this stock turned into a Value looser.

With the heavy losses that many have incurred investing in small/mid caps with questionable business models, a sound strategy would be to have a few VERY HIGH QUALITY names in ones portfolio.

These stocks will ensure that you will definitely become wealthy, though it may take longer than your initial expectation. These stocks are likely to grow at a healthy clip (10%-15%-20% or even higher) every year for many/many years and with high ROCE and growing dividend payouts.

Some of the names that come to my mind are:

Page Industries
Gruh Finance
Asian Paints

The coming year, with its volatility, will provide ample opportunity to enter some of these VERY HIGH QUALITY names at reasonable prices. It may make sense to gradually nibble into these names and have them as some part of your portfolio. You will also sleep well. :grinning:


If someone thinks buying quality at exorbitant price will limit the downside from midcap/smallcap crash, one should refer to the below chart and infer accordingly.


Biggest dilemma I face in correction is even the stocks which were looking like quality once starts looking like some trap. For example, Avanti feeds and Ajanta pharma has performed v well over last few years but right now not getting the courage to buy due to growth concerns. And the ones which are too big and too good like Pidilite , HDFC etc , they dont correct,

So even if I have funds to buy , most of the times , I don’t understand what to buy in correction. Many small midcaps and small caps have corrected in few months but I am not understanding what to buy :frowning:

I know its not good to ask what to buy in current correction but still if people can advise what are some good companies which are sustainable and profitable in long term as per them , which have gone under correction.

  1. Many looked at PE ratios for deciding what to buy. Unfortunately, PE ratio is only one of the many valuation parameters to look at before buying. Buying low PE stocks has given shocks as PE’s have fallen further for these mediocre stocks.

  2. If you look at the past many years, most of the above mentioned stocks (Page, Gruh, HDFC Bank, Asian Paints) were always expensive and will remain so as long as their growth stories continues.

  3. I recommend the reading of ‘Common Stocks and Uncommon Profits’ by Philip Fisher. Following his advice on buying VERY HIGH QUALITY stocks and staying with them for years and years has paid out for many. Yes, these stocks don’t double in a year but you can put large amounts of capital and gain from steady compounding. In my opinion, just showing a price chart of Cisco or Wipro and not investing in VERY HIGH QUALITY names is not the right way.

But one does not need to follow the above advice. As they say, there are many ways to make money in the stock market and each to his own.


Till now I followed the low PE strategy only. But ultimately price is function of PE and Earnings. if the earnings in future goes down , PE automatically goes up, and stock may also do PE de-rating. Finding low PE stocks is not a difficult thing , main task is to find where the earnings growth will be. Currently Avanti and Ajanta pharma are trading at half of the multiples which they were trading few months/years ago. But the doubt is will they grow similar growth in future like past, If yes , they are at bargains. But this is a million dollar question whose answer is not easy to find out.


My opinion isn’t based on extensive experience like a lot of fellow members. But, please bear with me.
On this forum as well as on various social media outlets I’ve read posts waxing lyrical on the importance of investing in quality. In my opinion, it’s the outcome bias. Large caps haven’t corrected substantially. Hence, they’re being termed good quality
For stocks that underwent a deep correction, blanket statements on their poor governance are being made. It’s rightly said - Hindsight 20/20

Could someone advocating Investments in quality companies objectively define quality?

To me it seems that if sometime in near future, were large caps to see a drawdown, we’ll jump on the bandwagon and lavish criticism on these behemoths as well.

When it’s clearly known that markets function on fear and greed, how do you make sense of the chaos?
By looking backwards and making post hoc rationalisation.


Look at good MFs if not sure of direct equity. Put some amount whenever there is correction.

It is simple way to take advantage of corrections. I assume that is what you want.

I just looked at the highest prices of HDFC Bank, Page, Asian Paints and Gruh at the height of the 2008 boom and just before the bust.

HDFC Bank Rs 365 (today’s price Rs 2065)

Page Rs 480 (today’s price Rs 28,000)

Asian Paints Rs 118 (today’s price Rs 1290)

Gruh Rs 11 (today’s price Rs 306)

While one can leave out Gruh and Page as their past history was not so well know, Asian Paints and HDFC Bank were blue chips even at that time. And they have given a fantastic return even when bought at the height of the boom.

Before you take out your one stock which has performance even better than above, you need to answer how much of your capital did you put in that one stock? In case of the above 4 stocks, you can put a very large portion of your allocation. But yes, the time period of expecting a return has to be 5-10 years and not the next 6 months or 1 year.


Well, if you select NTPC for assessment, it’ll emerge that it has been a wealth destroyer over the past 10 years. NTPC was and is a bellwether of the power sector.

There is no dearth of examples to suit one’s opinions.
Please excuse me if I’m overstepping but from the little I know, I feel that hardly anyone knows where the market is headed, which stocks and sectors will do well, etc. There will be times of excesses - on the upside as well as on the downside. And, we have no option but to embrace it.


“I’d be a bum on the street with a tin cup if the markets were always efficient” Warren Buffett

“Naturally the disservice done students and gullible investment professionals who have swallowed Efficient Market Hypothesis has been an extraordinary service to us. In any sort of a contest – financial, mental or physical – it’s an enormous advantage to have opponents who have been taught that it’s useless to even try” Warren Buffett

"Academia failed. The professors at our greatest universities have perfectly asinine ideas - first, about efficient market theory. One of those people influenced McKinsey [& Company] so much that McKinsey came to the Washington Post at the time it was selling at one-fifth of what it was plainly worth as a share of the total enterprise, and said, "You can’t buy the stock in because, under efficient market theory, it can’t be worth a fifth of what people would pay for the whole company. Of course, the kind of mind that would keep a stupid idea like this when they have a fact that would clearly refute it - it clearly violates traditions of science and mental decency. They taught this drivel to our children for decades and, by God, a lot of people are still doing it. It was in the major textbooks in economics and people as smart as Paul Samuelson believed it - and that is a significantly smart man.

"How do smart people get such dumb ideas and hold them so long? Then these ideas from economics drifted into corporate finance, and they got the capital asset pricing model - also pure drivel. They taught it to all of our children and the law schools picked it up. They didn’t understand it, but they could repeat it like a mantra from Buddhism, and people would learn it and regurgitate it on the examinations and they get A’s and so forth. Of course, they got out into the real world and they were menaces to decency and sound thinking. That didnt bother the people at Harvard University or any of the people that were doing it. And you say, how can smart people do such immensely dumb things? " Charlie Munger

“In my opinion, the continuous 63-year arbitrage experience of Graham-Newman Corp, Buffett Partnership and Berkshire illustrate just how foolish EMT [Efficient Market Theory] is” Warren Buffett


Nobody makes money by sharing information which is negative.
There are plenty of people who get access to management and plant visits. One of the unwritten rules is you don’t share anything negative.

If you discover something negative which compels you to sell. Would you rather

  1. Tell everyone why you are selling
  2. Sell and then disclose
  3. Remain quiet

Even if you go with option #2 , the chances are that you won’t get access again because people will think you are untrustworthy.
As an example a brokerage would visit a cement plant on a regular basis and and keeps talking about how it’s undervalued on a EV/tonne basis. What they won’t answer is WHY is this undervalued. Is it because of some problem in the plant design or machinery or fuel linkage?

Front running mid cap mutual fund inflows for Alpha

A lot of PMS managers delivered results by calculating technical liquidity conditions in stocks where mutual funds buying has huge impact. How much is the floating stock and how much of that is available to trade. What is the mutual fund SIP inflows going to be and how is the continual demand going to impact the price. If mutual funds are going to buy 5Crore around the 10th of this month at what price can i sell it to them?

Liquidity drying up when mutual funds sell will cause real carnage

The real source of “re-rating” of valuation for some mid cap companies esp those that trade at 30X + PE is a lack of floating stock. Watch what happens when a mutual fund decides to liquidate a position in a mid cap company and it takes about 200 days of trading days (an entire calendar year!) for a position to be pruned.
This is just for ONE scheme of ONE fund.

How are the coat tailing investors going to respond? Will they provide liquidity for the exiting mutual fund by buying? Or will they want to sell ASAP worsening the liquidity imbalance

“liquidity is an illusion … It’s always there when you don’t need it, and rarely there when you do.”