Consistency Matters
10 Doubles in Four Years
How to Get a Stock Market Bargain ---
I took some time over the weekend to reread some of the small-cap investing advice that I’ve published during past periods of market volatility. One of the things that struck me was that I don’t remember these periods very well! It’s sort of like when you spend time with a newborn (which I’ve been doing a lot of lately given that I have a three month old) and you think you’ll remember the special moments. You don’t, of course, unless you’ve written them down. Otherwise, it all kind of blends together as new memories displace the old.
Thankfully, I have a lot of stock market advice written down. And it turns out that over the years I’ve been fairly consistent in the small cap advice that I’ve given during challenging markets. Most of the advice is the same each time the you-know-what hits the fan, as it’s been doing lately.
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For example, in the spring of 2010, small caps were in correction mode, and ultimately fell 15% before finding bottom. This is what I wrote in the middle of that correction:
“It’s good to step back from the market and assess the situation from time to time. Now is a good time to do this, and there are a few key facts that we know for sure: Stocks had a heck of a run from their March 2009 lows. Investors were bound to take profits at some point, and should have. There are debt concerns throughout the world. There are all sorts of other problems—there always are and always will be. Many companies have real profits, and are operating very efficiently. Stocks go up, down and sideways… If you believe, as I do, that we have a real economic recovery underway, then you should be using this pullback in stock prices for two things: To exit stocks in underperforming companies that you don’t want to hold for the next round of either selling or buying, and to average into the positions that you do want to hold for the next round of either selling or buying. Buy what you like, and sell what you don’t. It’s pretty much that simple.”
A year later, after small caps had rallied 40%, the market was in turmoil again. Small caps fell 22% between March 31, 2011 and August 31, 2011. I wrote the following in mid-April:
“It sounds simple: Find an investment strategy you believe in and stick with it. However, most investors fail to take the simplest approach and follow one strategy. Instead, most retail investors constantly seek the latest and greatest investment strategy and go with it—just to the point where it ultimately fails to meet their short-term expectations. The only small-cap investing strategy that works is the one that you stick to … Choosing investment strategies isn’t like dating—you can’t try them out for a little while to see if there’s a potential match. A successful investment strategy is a long-term relationship that requires commitment, discipline and conviction. The good news is that investors who pay attention to small-cap stocks and want to outperform the market are starting in the right place. This asset class has outperformed large caps over the long term, despite the fact that small caps are much more volatile. My strategy is simple: Look for undervalued small and micro-cap stocks that have significant exposure to the major growth trends in today’s global economy. I believe that each stock we add to the portfolio has a legitimate opportunity to double or triple—or more—in value over the coming years. This strategy is how we expect to significantly outperform the market, and it’s why we believe small companies are an absolute must for every portfolio. It’s also why we are able to keep our heads on straight when market weakness hits, and small-cap stocks fall faster than other asset classes.”
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Ten Doubles in Four Years
I think that’s pretty good advice (over the following four years I was able to direct subscribers into 10 stocks with triple digit gains!), and it’s as relevant during the current market correction as it was in 2011.
The small-cap investment strategy I’ve developed factors in a lot of things. But at a high level, I’m looking for highly leveraged exposure to specific investment themes through select small-cap opportunities.
I’m always looking for high tech companies that are pioneering new ways of doing things. But I don’t like to discount traditional businesses. A lot of very successful small-cap investments come from very basic business models: the corner convenience store, the healthy food manufacturer or the high-volume concrete company.
And a lot of money can be made by keeping things simple.
Because timing and price is so important, I think the subject of buying small caps during periods of market volatility bears a little more discussion. It’s not like every investor is sitting at his or her computer watching a small-cap stock they want to buy, or that the moment they’re ready to buy is necessarily the best time. Sometimes the best time to buy is when you’re not paying any attention at all!
How to Get a Stock Market Bargain
There are two different types of orders you can place to get the deal done on your terms and that are particularly helpful when trading comparatively volatile small-cap stocks.
Market order. This is the standard order and means that your trade will be executed at the current market price. Market orders are typically executed immediately at the best price available. For small caps with low volatility, the market order is an easy one to place. But in many cases, market orders aren’t the best for small caps since they tend to be more volatile than their large-cap cousins, mainly because of lower liquidity. Instead, I recommend using limit orders.
Limit orders. When you place a limit order, you state the exact price at which you wish to buy (or sell). The order will only be placed if that price is available. While limit orders don’t get executed as quickly as a market order, you’ll have the assurance that the trade will be made at your desired price, or not at all. This is a smart way to trade small caps (or any stock, for that matter) because you set and control the price based on pre-determined criteria, not based on emotion in the heat of the moment. One of the real benefits of a limit order is that you can enter a limit order at a “dream price,” say 10% or 20% below the current market price, and set it to remain open for days, weeks or even months. I’ve seen these orders filled more than a few times with small caps, especially when the market is going crazy.
Remember, a successful investment strategy requires commitment, discipline and conviction. Keep things simple, and stick to your strategy. If you need a little help figuring out exactly what strategy is right for you, whether it be small caps, options, growth stocks, emerging markets or dividend investing, our analysts here at Cabot are ready and available to help. We have over 200 years of collective experience. And unlike financial advisors who make money on trading activity, we rely purely on the value of our investing advice.
Membership to my Cabot Small-Cap Confidential advisory is the best way to cash in on small companies with big ideas. Membership to the advisory is currently closed; however, given the opportunities that the market pullback has created in small cap stocks, I’ve made special arrangements for a few more Cabot Wealth Advisory readers to join us. So if you missed your chance to reserve your spot, now is the time to do so. Click here for details.
Your guide to small-cap profits,
Tyler Laundon
Chief Analyst, Cabot Small-Cap Confidential 2.0
