growth investors lack the conviction needed to hold on for the big gain.
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.
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
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.
Investorfile, we feel the conviction needed for small cap investors is based on
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
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
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.