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About Bitcoin, Small caps and Growth investing!

What do we call this frenzy? And, why is it happening?

We call it Fear of Missing Out (FOMO)—a very popular term in stock markets. Markets have been reacting swiftly to each theme, as people are getting greedy.

There is too much Money in the system globally. Bond prices are coming down due to increase in interest rates, so the money is being parked in equities for retirement goals. In India specifically, the salaries are not growing like they did before (12-16%), Real estate is not booming, gold has been lacklustre, and with fall in inflation rate, fixed deposits interest rates are lowering.

A perfect recipe for greed in assets which offer even slightest excitement!

Bitcoin has taken off recently, and 95% people don’t know what it is and its exact potential. We too belong to the “I don’t know” side. But, we are certain that there is no free lunch, and the euphoria would die when some regulation kicks in.

Small caps are behaving like passing the parcel. Most of these companies are so small that we wonder they would even survive over next 2 years. Brokers/operators are paid to bid up the stock prices. Small buyings, e.g. less than 30-40 Lacs, move the stock prices north of 10-15%. This draws more participants, and hence, further uptick. Retail/HNIs are interested, so why not? The broker makes a cool commission for passing the parcel. Promoters buy and sell out calmly with different names.

“Only when the tide goes out do you discover who’s been swimming naked.” – Warren Buffett

Then there are growth stocks, one of our hunting grounds, where the quality and long-term stability is average to good, but excitement is very high. An investor is sold the story. ‘If you had bought this stock/fund worth Rs.50,000 instead of buying a bike, you would have earned yourself a Mercedes today.’ We wonder if the writer knew any of this in advance, did he/she himself/herself invest in that stock/fund. We have seen many of the Fund Managers are not invested in their own funds, let alone expecting an investor to stay put!

The companies showing growth, with big question on sustainability of growth, are getting bid-up. The growth gets factored in the price, but for mutual funds, the money keeps coming in, so they have to deploy anyways. The broker suggests same stocks at higher price multiple, showcasing some impressive pie charts and analogies from different markets justifying slightly more optimistic forecast. “The only function of economic forecasting is to make astrology look respectable.” – John Kenneth Galbraith

What makes us believe that this is something unusual?

Stock-prices reflect the growth in earnings of underlying asset. We are all hearing the growth in corporate earnings is not happening, still the stock-prices are making steep moves. No stock can move three-four times in price, unless earnings are moving at that pace. There are 1,500 such stocks which moved atleast 3 times in last 3 years. The clear disconnect makes us believe that any rational person should not fall for this. We don’t know when it would end, but we are certain that the end would be terrible!

In such situation, having patience is the key.

‘It takes character to sit with all that cash and to do nothing. I didn’t get top where I am by going after mediocre opportunities.’ –Charlie Munger

We believe one should focus on his own investment period and buy the asset only when the returns more than compensates the risk. If you are investing for long term and have goals in mind, you really don’t have to pay heed to the current saga going on in the market. Buy only those stocks which offer some margin of safety. These stocks may fall temporarily with the market, but you won’t lose money over long term. One thing is sure, the future returns on today’s investment could be lower, so it’s better to prepare our mind in advance and not fall prey to fast rising stocks. But for your future savings, you still stand a chance to higher returns.

“You have won half the battle in Investing if you’re comfortable watching someone else make quick money in a bull market, while you are waiting on the sidelines. You will go a long way, while the other fellow will quit in the very next fall”

This post first appeared on Principles Of Value Investing, please read the originial post: here

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About Bitcoin, Small caps and Growth investing!


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