Trader’s Edge | Back-to-basics strategy of this Delhi duo turns a wealth creator 

A deeper understanding of of corporate events, thanks to their day jobs, also helps Ghanisht Nagpal (left) and Tushaar Talwar (right) in making right trades.

Small and microcap segments of the market are the riskiest ones, but they also deliver proportionate rewards. A lot of money is made in them and even greater money is lost everyday. There are many investors who have made their name investing in such stocks. Ashish Kacholia, Porinju Veliath and Dolly Khanna are perhaps the most renowned in the league.

So, what is it that makes them so successful? The brainstorming to find an answer to this question made Ghanisht Nagpal (@GhanishtNagpal) and Tushaar Talwar (@tushaartalwar) arrive at a strategy that is reaping rewards for them.

Nagpal is an investment banker, while Talwar is a corporate lawyer. The duo, based in Delhi, found out that the Khannas and Kacholias of the world try to invest in companies when no one notices them. The earlier they are able to invest, the more they manage to gain.

Back to basics

Most investors who want to make it big try to read research reports, watch TV interviews, scan through annual reports, and so on to arrive at a decision to invest. Well, Nagpal and Talwar did their fair share of that as well.

However, after years of trial and error, they failed to emulate the success of the famous investors. Eventually, Nagpal and Talwar arrived at one slightly different approach. The idea was the same, i.e., to buy small companies in their early days of resurgence, but the method was different.

They went back to basics, as basic one can go – exchange filings.

Under Securities and Exchange Board of India (Sebi) rules, all listed companies have to notify shareholders and the general public about their corporate action through stock exchanges. Stocks usually react to them. That means, the root of all market movement can be found in exchange filings of companies.

After years of trial-and-errors and thanks to their professional experience, Nagpal and Talwar found that there are certain corporate actions – open offer, takeover, name change of the company, and so on that work as a trigger point behind microcap companies becoming smallcap and smallcap companies becoming midcap ones.

The duo say they have found success through their approach. Last year. they made 102 percent, despite the market being volatile. In traditional sense, what they do cannot be termed as investing as they don’t usually consider fundamentals as their investment thesis. It can more broadly be described as event-based trading.

Setup

Nagpal and Talwar say the idea is to have a 60 percent hit rate (that is, six correct calls out of 10). The duo explain their strategy in following steps:

Step 1: Go through all exchange filings everyday. Sick to microcap and smallcap companies that are not well tracked. Most largecap and midcap names are well tracked and you will not get any first mover advantage.

Step 2: Try to find out those relating to takeover, open offer, preferential allotment, etc. They are usually a sign of something big happening in a company.

Step 3: Delve a little deeper. Try to find out who are the people investing in or taking over a company. Sometimes, promoters of large listed companies, when expanding business or moving into another business, try to acquire very small companies. For instance, when promoters of APL Apollo Group bought a small NBFC or similarly when a promoter of a recently listed hospital chain bought an NBFC. In both instances, the stock of companies that they acquired shot up. If you found out the details of such business moves early, you have struck gold, say Talwar and Nagpal.

Step 4: Buy as early as possible as sometimes, liquidity dries up pretty quickly in such stocks. And sit back for the market to recognise the opportunity. Sometimes, you may just have to wait a couple of months and sometimes it may take longer. A few times, when your call goes bad, you may suffer a loss too.

Risk management

The strategy is extremely risky, Nagpal and Talwar mince no words when they talk about it. They add that four out of every 10 calls they make go wrong as not every business endeavours of successful promoters work out.

One also needs to have an eye for details to spot such opportunities in the smallcap and microcap segment, the duo says.

They say what has worked for them is to create a basket of such stocks, which distributes risks. They aim to be right at least 60 percent of the time. If six stocks out of 10 stock bets give them good returns with a few turning into multi-baggers, losing a large chunk in rest will not hurt much, they add.

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