OLD ARTICLE – Original posted on February 16, 2016
All the global uncertainty and domestic panic is a great opportunity to re-evaluate your risk profile as an investor.
If you are reading this website, I think it is a fair assumption that you are interested in (if not actually actively) invest in the JSE small cap market.
But why are you doing this?
Here are a couple answers to the above question. See if you answer ‘yes’ to any of them:
- Because it is exciting!
- Because I’ve only got a little bit of money, so I have to take extra risk to make it worthwhile.
- Because I want to ridiculously rich and launch a hip-hop music video (gold chains don’t buy themselves)!
- Because I don’t mind taking risks to get rich quickly (definitely quicker than with boring blue chip stocks)!
It’s probably pretty obvious that if you answered ‘yes’ to any of the above questions, you really shouldn’t be investing in the small cap space.
Allow me to elaborate on the above answers with the below explanations:
- Excitement: Investing should not be exciting all the time. Sure, sometimes it can be, but the vast majority of it is just research, admin, work, thinking, deciding, doing and then waiting (while you repeat the cycle). If you are seeking excitement, rather go to a casino.
- I’m poor, so I can only afford small caps: There are so many reasons why this reason is misguided, it is hard to know where to start. If you have so little money as to not be able to “afford” blue chip stocks, then perhaps you should not be in the stock market and rather be paying off your bond? Pennystocks are not cheap because their nominal share prices are less than blue chips, in fact, many pennystocks can be more expensive to invest in when they come crashing down and you lose your money… This answer just shows that you need some financial education! Have a look over here.
- Infinite riches; Sure, well-selected small caps can generate ridiculous returns, but those are few and far in between (my guestimate is literally one-in-a-hundred). This mindset shows impatience, which is probably the biggest slayer of private investor returns than anything else. Besides, hip-hop is dead. Lil Wayne killed it.
- Get rich quick: Once again, the underlying impatience here will likely lead you to do too little self-education, too little research, make rash, risky decisions and then overtrade once those poor choices play out.
So why should anyone be investing in small cap then?
It is quite simple: as part of a larger portfolio plan, a carefully selected allocation (whose ultimate percentage is dependent on your risk profile and time horizon) to small cap equities can bring diversification benefits and over the long-term generate superior returns that help you build your own personal wealth.
I do suspect that the above statement pretty much sums of most of you. And, personally, I cannot think of any other reason to play in this space.
Can you?
If you are a small cap investor for this reason, then there is not fear and panic and chaos… If you are a small cap investor for this reason alone, then there is just an allocation into a long-term plan.