Should you buy Blue Chips or Small Cap Stocks?

Blue Chip Companies have a big market cap, good brand value, a lot of customers, provide good liquidity in stocks, provide good turnover in trading, are tracked by all Stock Research houses, etc. All these are positive factors of Blue Chip companies compared tomid-capp stocks and small-cap stocks…. But do these factors make Blue Chip companies a Great Investment also? My answer is — No …. Why?

Because a Good Company does not necessarily mean a Good Investment….. There is a difference between a Good Company and a Good Investment, which most retail investors do not understand…. When I ask investors why they invested in a particular company, they start telling the positive things about the company…. But they all miss the most important point to be remembered in investing….. If a Good Company is trading at a FAIR valuation, it becomes just an average investment…. And if a Good Company is trading at above the fair valuation, it even becomes a Bad Investment !!…. So a Good Investment means a Good Company available at an undervalued price.

So, coming to the main point asto why I do not like Blue Chip companies…. Because Blue Chip companies are very unlikely to be undervalued…. Blue Chip stocks are tracked by many stock research houses, stock analysts, HNI, Mutual Funds, FIIs…. So all the future potential of those companies is factored into the current price…. Even if a Blue Chip company is going to post 100% growth every year in the next 3 years, it is not a Great Investment because all that growth potential is factored in the current price…. So how can a retail investor make money? Read on …

Money is made by buying Good companies which are not famous, not tracked by research houses and investors…. Generally, these types of companies are not very big….. But they have a good business model, good margins, good future potential… Only thing is that they are not in the limelight because investors are falling on each other to buy Blue Chip stocks….. Let us understand the point through a practical example below…. Things become very easy when understood through a practical example.

In April 2014, I gave a very strong fundamental buy call at KPR Mills, which was trading at 121…. When I studied the company, it looked extremely undervalued to me…. I went in further depth and did some more research …. The more I researched, the more great the business of the company looked to me and the more undervalued it seemed to me…. Trading volumes were very low, and the company was listed on the SE only….. None of my investor friends even heard this name,a nd when I told them about my newfound Gem… I told them that I am going to take a major position in the company…. Nobody agreed with me,a nd they also gave me some investing lessons about Blue Chip companies…. But I could not ignore the company because its fundamentals were very sound and the current price did not justify its fundamentals….. Those who know me know that I always play a lone hand in stock markets…. I only need my own conviction about a stock to take a position…. If I am convinced, then I take positions even if the whole world is against me…. So I bought the stock heavily inthe next few days…. I told this newfound gem to all my followers aonFacebook (All messages are saved from 2014)….. In the next 4 years, the stock rocketed from 121 to 1750 (taking a 1:1 split into factor) !!!! ….. Yes, 17 Times in 4 years…. And this price rise is not because of the market rise…. Sensex was 23,000 in April 2014…. So Sensex rose just 40% in the next 4 years, and KPR Mills rose 1700 % !!! ….. And Chaman Lal Setia Exports multiplied 41 times in less than 4 years…!!!….Can any Blue Chip company multiply 41 times in 4 years ?…. That is why I invest insmall-capp stocks…. The only thing is that I buy QUALITY small caps.

Happy Investing !!