Publisher’s Note: The Daily Reckoning this week will come from Sam Volkering. Sam also writes, analyses, and recommends stocks for small-cap advisory, Australian Small-Cap Investigator. Today’s Daily Reckoning is adapted from Sam’s weekly update to his small-cap subscribers on 9 June. Enjoy.
In the last three months, the ASX All Ordinaries are down 6.17%.
Normally I wouldn’t give two hoots about what the ‘All Ords’ are doing. I say this because the main companies that make up the All Ords aren’t interesting for a small-cap publication.
However, the All Ords and the ASX’s biggest companies do hold a fair bit of sway when it comes to the general sentiment and movement of the overall market.
I’ve explained before that of the total $1.5 trillion market cap of the ASX, the top 100 companies account for around $1.4 trillion. That’s about 93% of the ASX in just 100 companies, of a total 2,177. That means there are 2,077 companies that account for the remaining 7% of the market.
That makes it an embarrassment of riches when it comes to picking small-cap stocks on the ASX. And it makes it pretty exciting too…
When the market falls by over 6% in a few months you can bet your bottom dollar it’s all over the news. Here’s just one of the headlines, from the Sydney Morning Herald: ‘$40 billion wipe-out in the ASX’s biggest rout in two years.’
Now that’s got to have an impact on the confidence of shareholders. And I’m not just talking about shareholders of your typical blue chip stocks. When you’re bombarded with negative press and you continue to see the market nosedive, it’s hard not to get caught up in it all.
It’s like a car crash. You end up rubbernecking whether you like it or not. Sometimes when the weather is stormy it’s just best to rug up and wait out the storm. Sometimes you should just turn off the news for a day or two; it’ll do you a world of good.
That doesn’t mean you have to ignore your investments. But don’t follow the herd and look for an exit because you heard someone say ‘impending doom’ at a BBQ. There’s every chance they were just talking about Carlton’s hopes of getting good any time soon!
When you have a strategy, stick to it. Have conviction and back yourself. When you’re investing in small-cap stocks, it’s imperative to ignore the noise and stick to your guns.
If you have a five year horizon and you’re a year into it, don’t get shaky knees. And when it comes to the stocks in the Australian Small-Cap Investigator portfolio know this: if there’s a stock I don’t think is going to make it, you’ll hear about it from me.
It doesn’t matter how much I personally like the stock, if we need to sell, we’ll sell.
The last week has been a minor hiccup for the whole of the ASX. It’s driven by a bit of fear and a mixed bag of economic figures. The old self-fulfilling prophecy rears its ugly head and stocks see a sell off. Of course, not all stocks were down, and that’s possibly the whole point here.
If you listen to and follow the general herd then you’ll always end up like the masses. But if you sit on the fringe a bit — and you clearly do if you’re investing in small-caps — then you need to have an extra pluck of courage from time to time.
Focus on your strategy and the stocks that you own. Have conviction and, please, don’t try to invest based on what you hear on the news.
Editor, Australian Small-Cap Investigator