Stocks have had a rough and tumble time these past few weeks.
It’s been even rougher on the small-caps.
You shouldn’t find that strange. In fact, when you think about the forces battering Australia’s economy…it’s predictable.
But just because small-cap stocks have taken a breather, it doesn’t mean you should ignore emerging companies altogether.
If you overlook this sector, you could miss some sensational gains.
And if you approach small-cap investing based on what’s happened across an index…you’re playing the wrong game.
Let me explain…
The small end of the Australian stock market can be a bad neighbourhood when investors lose their appetite for risk.
That’s because when companies and markets are looking shaky, people often flock to what they view as the safety of large companies.
The price action of the past few weeks bears that out to some degree.
The past fortnight has shaved 2.5% from the value of the Aussie blue chips in the S&P/ASX 200 [ASX:XJO].
But the minnows in the S&P/ASX Small Ordinaries [ASX:XSO] have fared worse. In the same period, these stocks have lost 3.6%.
The speculative end of the market has underperformed recently. As a small-cap analyst, I won’t hide from that.
But here’s the secret: Small-cap investing is always about stock-picking.
You’ll never reap huge triple-digit percentage gains by punting on the direction of a market index.
But with a few carefully chosen speculative stocks, you can rev up your investment returns so powerfully that you’ll leave the index-huggers in your dust.
I’ve helped thousands of investors lock in stratospheric gains on small-cap stocks this year. And with your permission, I’d like to help you do the same.
I’ll reveal some of our big recent winners in a moment.
But first, let me show you one of the most powerful reasons why small-cap stock picking can reward you so richly.
In short: making money from the stock market is as much about avoiding losers as it is about picking winners. And there are many losers to avoid in the small-cap sector.
Big gains on the table
If a fund management company is ‘taking care of’ your wealth…this chart may alarm you.
And by ‘taking care of’, of course, I mean ‘siphoning management fees away from’.
It reveals the extent to which professional small-cap investors have been beating the market. Just as importantly, it shows how much value your average large-cap fund manager destroys.
By the way, this affects every Australian with a superannuation fund that isn’t self-managed.
As measured by Morningstar, the chart shows the performance to 30 June 2014 of actively managed Australian investment funds over one, three and five years.
Each bar shows the percentage of fund managers who underperformed their benchmarks. In other words…the taller the bar, the more value the fundies destroyed.
Source: S&P Dow Jones Indices
Click to enlarge
You should draw two conclusions from this.
Here’s the first: The average large-cap fund manager is no good at generating ‘alpha’. That’s fundie jargon for ‘beating a benchmark’…which itself is fundie jargon for ‘performing’.
You probably won’t find that headline in the next glossy brochure from your super fund.
But the second conclusion could make you rich. It shows that the small-cap sector offers you a far greater chance of beating the market.
The fact that so many small-cap fund managers beat their benchmark shows you that big potential gains are on the table.
All you have to do is ignore the no-hopers…carefully select some speculative winners…and enjoy the ride.
By the way, investing in speculative companies is always risky business. You should never allocate more of your wealth to any one speculative stock than you can afford to lose.
And of course, most of the companies in the Small Ordinaries are volatile. Many of their shares don’t offer investors much hope of making money.
You can leave those stocks for the birds.
Over the years, I’ve honed a technique that sorts small-cap losers from the potential winners.
And when these stocks win, they can win big.
You can reap tremendous rewards if you back a winning company while it’s still a speculative punt.
For example, take the little healthcare company that has brought my readers a total return of 166% in just over a year.
Or how about the cutting-edge tech stock I tipped to my Australian Small-Cap Investigator readers in August? It would be unfair to my subscribers if I told you the stock’s name and ticker symbol…but as of this morning, in less than two months it’s brought my readers a whopping 232% gain.
Not all of my picks hit the stratosphere as quickly as that. But every small-cap stock I recommend offers huge potential to electrify your portfolio.
There are rich potential rewards waiting for you in the small-cap sector.
You don’t have to spend hours reading balance sheets, and you don’t have to risk a lot of money up front.
All it takes is a few minutes a week…a desire for explosive gains…and a healthy sense of adventure.
For, The Daily Reckoning