In my experience, a vast majority of small investors do not create substantial wealth in a consistent manner. It is partly due to the fact that they do not understand their own strength! For many of them "price movements" become the guiding force – if fundamentally sound stocks don't move in line with the market or fall despite market rise, they become "boring" stocks and they tend to offload them in the markets.
The unique opportunity in the domestic equity markets, as per the long history of domestic equity markets, is that small individual investors alone can enter the good value stocks / multi-baggers with significant weights in their portfolios at the initial stage of market-cap cycle itself. They can harvest the fruits of wealth creation by staying long in such stocks.
While for them the "size" (market-cap) of a stock doesn't matter, it is most relevant for the institutional, especially for the foreign investors, who cannot enter small-sized companies at the incubation stage considering their large investment appetite.
The stock price of CEAT moved up from Rs 99 a share in September 2013 to nearly Rs 1,000 in November 2014, and during the same period the stakes held by the FIIs rose from mere 0.03% to about 25%. The marketcap of CEAT on free-float basis moved up from mere Rs 198 crore in September 2013 to over Rs 1,813 crore in November 2014 when the stock price moved up more than 10-fold from the level seen in September 2013.
For many institutional investors "size" (market-cap) matters most, more than the run-up in the stock prices before their entry due their large appetite. It is not unique with CEAT or to the current bull run – there are many more examples in the past, encompassing several industries.
Manappuram Finance had a market cap of just Rs 175 crore in March 2008 and at that time the FIIs had a mere 3.95% stake in the company. The same moved up to 30.25% in December 2010 when the market-cap of Manappuram jumped to a whopping 38-fold to Rs 6,718 crore!
Similar is the case with TTK Prestige whose market-cap spurted 33-fold from Rs 132 crore in March 2008 to Rs 4,422 crore now, while the FIIs' stake moved up 2.27% to 20.32% in the same period! There are many more such classic stories like Phoenix Mills and City Union Bank, whose market-cap rose 55 times and 24 times respectively in the last 10 years while the equity stakes held by the FIIs increased from almost zero to 33% and 23% respectively.
Many small investors miss out such opportunities because many of these stocks remain quite illiquid at the beginning stage of "wealth-creation" cycle while actually the size doesn't matter for them. They also need to learn that the risk to investments in such stocks doesn't arise from the "liquidity" or "size", rather from the 'stock idea' itself. Liquidity and also market-cap expansions follow, if the stock idea (business) succeeds.
The investment risk arises from staying long, only if the idea (business or company) itself fails to deliver. Hence, a word of caution - the art of staying long and continuous accumulation for averaging down the cost of acquisitions is applicable for smaller sized companies, only if the fundamentals and business remain strong.
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