Right Price Quality

“Quality always comes at a price”. This often-repeated argument about mid-caps is suddenly looking a bit wobbly. The reason is that the price has got too stretched for comfort. Several stocks that once enjoyed disproportionate fame and following have lost a third of their peak value. Slowly, the list of correcting stocks is growing. The list of rapidly correcting stocks would grow much faster but for the Indian public’s irrationality. Retail investors are putting all their monies in mid-caps. This only means that we are committing the same old mistake of concentrating bets in one space. In 2008, it was infrastructure. We can’t have smaller companies trading at higher valuations than bigger peers. Yet, that is the irony of our markets. This is the perfect setting for volatility to rise.  Any pressure on performance or failure to meet expectations will get a brutal response from the markets. This makes the notional gains made by investors who selectively played only mid-caps very vulnerable. The drastic fall in large caps only make them relatively even more attractive than the mid-caps in relative terms. The stage is set for a more balanced approach to equity investing. We will see valuations converge over time. The latecomers to the midcap party will see the temperament get badly tested. Caution is the watchword on mid-caps. If we don’t exercise it now, our conviction will be badly tested later. Better wisdom must prevail on our approach to quality stocks. Wealth creation should be approached with greater balance.

“Volatility is a symptom that people have no idea of the underlying value.” – Jeremy Grantham

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