This too shall pass !!!

Every trend in the market is a passing one and none is permanent . So is
the current over dose of pessimism in small and mid cap value stocks in
India . That should be comforting for the sullen value investors who are
facing one of the most manic times in the recent past . Value investing has
been the least rewarding investing style in the last few months . More so ,
with the market’s obsession for the few narrow flavor-of-the-season stories (
notably FMCG and consumption) . Market is not just ignoring the rest of
the space , but beating it down with unjust punitive price action crushing
down “value” to “deep value” , if not to ultra-deep .

Few times have been as agonizing as this one for Value practitioners .
Market is depressingly partial for small-mid caps when it comes to its
response to quarterly earnings . Good score cards are met with an
uninspiring yawn while flat or average earnings are dealt with punishing
blow to their stock price . Contrasting that , there is irrational exuberance in
the market’s favorite stories ( FMCG / Consumption or so called
defensives) , where even poor earnings are rewarded with unjust rise
pushing up even further the already stretched valuations . Case in point is
market’s ever ebullient reaction to below average earnings of consumption
plays like Nestle , GSK consumer and Lever etc .

In such a punishing market , it is rather easy to hide behind such defensive
stories ( to manage short-term returns) , but an unlikely place to create longterm
value for the portfolio . The reasons are not difficult to fathom . Sanity
does return eventually when the storm runs out of the rain . The swift
adjustment that follows in the beaten down mid and small cap value stocks
creates stunning value to the portfolio , while timing of such turn is
unpredictable though. As history shows , investors who bet on timing the
turn always fall out as the adjustment is sudden and sharp with no hint of it
coming .

There is of course no instant gratification and the wait is going to be longer
and agonizing . It is a difficult phase of the market down cycle which the
value investors have to survive to come through, easier said though .
Keeping the skeptical investor flocks together in this phase will be a key
challenge and winning that crucial round will separate men from boys in the
value investing space .

Happy Value Investing !!!

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