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Sep
26
Your small cap stock is down in value. What should you do?
Posted by: Gerry Wimmer
09/26/2021
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Many growth investors lack the conviction needed to hold on for the big gain.

Since the beginning of spring this year, the small/microcap market for stocks has generally been in decline mode. The vast majority of these growth stocks have share prices that have retreated from their year-to-date highs (as much as 60% to 70%) and, therefore, many small cap investors are feeling the financial pain.

The decline in small cap stock prices may be the result of economic uncertainty which is driving the negative market sentiment. At this time, it seems that the market has a higher aversion to risk, and risk is what small cap stocks inherently carry with them.

Will this trend change? Invariably, the answer is yes. When? It could be tomorrow, next week or maybe not until next year. Given this fact, some investors may feel they are now faced with a difficult decision: Should they cut their losses and sell out or wait for the small cap market to turn? Do you give up on your vision for the big gain on this investment?

The purpose of this Investorfile blog post is not about predicting market timing. Even the most recognized investors - the Warren Buffets et al – cannot do that with any regular consistency.

Our point is that growth investors can avoid the decision to sell their small cap stock(s) when the share price has declined if they have the conviction needed to hold on.

At Investorfile, we feel the conviction needed for small cap investors is based on three principles:

1. Doing the research: All too often, small cap investments are made by investors based on what they hear or are told about a stock, without doing any basic research. In many cases, investors buy small cap stocks based solely on trading momentum, without any understanding of a small cap company’s balance sheet, capital structure and market capitalization valuation metrics....not to mention its revenue model and profitability prospects. Therefore these investments are pure speculation and reactionary, which can lead to big losses, not big rewards.

2. A stomach for volatility: Most small/micro cap stocks trade inefficiently. Bigger buyers or sellers of the small cap stock can swing the price of shares in one direction or the other in big magnitudes. Investors need to be prepared not to react to daily share price movements. If small cap investors have done some research on their investment, they will be more likely to stomach the share price volatility.

3. Having patience: Business developments for a small company are unpredictable. In most cases, business goals take longer than expected. But even when goals are attained, the stock price for a small/microcap may not react until investor awareness for the company increases. Therefore, an investor’s conviction is tested by their patience to continue to hold such stocks until the investment community discovers the businesses’ successes. This process of business developments, coupled with investor recognition, requires an investment horizon that can take years, not months.

At the moment, the market downturn may cause pain for some investors. The flip side is that the lower stock prices for small caps are creating new investing opportunities, too. If you are thinking of adding some small/microcap stocks, buy and hold with conviction in order to reap the big investment gains down the road.


Read Disclaimer:

This article is for informational purposes only. This article is based on the author's independent analysis and judgment and does not guarantee the information's accuracy or completeness. The information contained in this article is subject to change without notice, and the author assumes no responsibility to update the information contained in this article. The information contained within this article should not be construed as offering of investment advice. Those seeking direct investment advice, should consult a qualified, registered, investment professional. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock.

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Hi Gerry, Your philosophy is focused on principles that have been shown to produce above average results over time and your record has clearly proven that. Congratulations on a great blog and thank you for the hard work that you do in sharing and updating your ideas; it is much appreciated.