They believe taking concentrated bets on your highest conviction ideas will help you to generate more returns compared to a diversified approach. If you are diversified (too much) then your performance will resemble the market performance.
Challenges in concentration when you have large portfolio size:
With size there are challenges in terms of deploying capital in small & Mid-sized firms. If your portfolio size is too big then you will have to build positions slowly over a period of time in small and Mid-sized companies to have a concentrated bet.
Churning portfolio in volatile market:
If markets are volatile you’ll find new opportunities to invest your money but it’s upon the fund manager/ investor to analyse “where is the best prospect of returns- not in near term but from a 3-5 year perspective”.
Challenge as an investor is not to differentiate between good ideas and bad ideas. That’s easy. The main challenge is to differentiate between good ideas and great ideas. An investor needs to take too many subjective calls while differentiating good ideas v/s great ideas.
We are always focused on small and mid-caps. Smaller companies have the ability to grow faster (%wise) than larger companies (Base effect). If we look at past performance we would notice: If we take most 5 yr or 10 yr periods you will find that small and mid-caps would have outperformed the large caps.
Volatility in small and mid caps:
Small and mid-caps are more volatile compared to large cap. Investing in small & mid-caps works when your horizon is for the long term. Investors need to be sensitive about investing in small and mid-caps if their horizon is for a short term. These are the the questions they need to ask before investing:
At what stage of the cycle you are currently?
At what valuations you are taking entry?
If your horizon is for the long term then entry and exit valuation become less important comparatively.
Reasons Sumeet sir prefers investing in small & mid-caps
Small and mid caps have the ability to grow (%wise) more than large caps.
There is a lot of inefficiency in the small and mid-caps compared to large caps and it is possible to find some great companies at reasonable valuation.
Scuttlebutt: On Ground v/s through technology:
Both of them have their advantages and disadvantages:
If we use technology to connect a company's supplier/ distributor or dealer then we can connect with more people and can get broad and diversified opinions whereas if we go on ground and talk with them one on one then we can connect with the company's ecosystem.
Views on IT Industry:
Economies of scale can be hugely beneficial but in IT services you don’t get that. If you look at IT services in the very long term in India then you’ll observe they have followed cyclical patterns. While there should not be much of cyclicality to the business but if you look at valuation they have followed that cyclical pattern & that’s because the growth beyond a certain level becomes difficult in IT services.
Questions one needs to ask if he is holding a highly valued stock or trying to build a position in that:
Can the current growth rate be sustainable?
Are you seeing the traction on the ground by customers? Or growing the company's order book?
What is your visibility for the near term?
If you can justify these things then either investing or holding onto those positions will help you.
Stories/ themes you come across and your views on them:
Never rely on the stories going on in the market. Do your research and if you believe that this story or a theme can work out then only put your capital into it. Let me give you one example of a theme/ story I heard in the market: China is manufacturing 25 million cars and we are only at 2 million. We are going to go to that.
But I think we can’t achieve that because look at china’s land mass, size, density and road system and compare it with India so before believing anything always do your own research and ground checks.