I’ve devised a simple test. This test will help you in your investing life. It will put you into one of two categories. You’re either a true investor, or you’re just one of the hysterical mainstream.
Before I explain this test further you should understand why I even bothered coming up with this to begin with.
Once you understand why this test is important you will understand why the answer matters so much. And once you’ve got your answer you can take action. And you can start to make an impact on your financial future.
My favourite part of the day
There are two things I do at the start of the day. The first is to check the activity of the stocks on the buy list for my investment advisory services, Revolutionary Tech Investor and Australian Small Cap Investigator.
The second is to have a quick look at the headlines. I’m more focused on the business sections, but will have a look at the homepage as well. Usually I’ll have a look at the Australian Financial Review, The Age, Sydney Morning Herald, The Australian and the ABC.
Most of the articles are behind paywalls. But to be honest I’m not overly interested in the content of the articles. I want to get a gauge for what the overall feeling of the day is. It’s pretty easy to understand what’s going on from the headlines.
Over 2015 and for the first couple of weeks of 2016 there has been one common theme when it comes to the markets and business sections — shock. There’s also been a healthy dose of distress and the imminent threat of a market crash.
It’s enough to traumatise anyone about the state of the markets. Just by simply looking at headlines every day it’s pretty easy to take a very pessimistic view of the market.
Reading such jarring headlines is difficult for investors. When you’ve got your ‘hard earned’ invested and your future retirement savings all tied up in the stock market — well it’s enough to scare anyone into utter terror.
You can’t avoid it either. If you don’t read it online, you’ll see it on the news. Or hear it on the radio. Every punter on the weekend will have something to say about the state of the markets and the economy.
If you’re one of those people who takes great delight in consuming mass media then you’re probably a bit scared of the market right now. However of the 2,185 stocks on the ASX, you would be shocked to know how many of them have made gains in the last year.
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The investor or hysteria test
At the start I promised you a test I had devised. By answering this test you’ll find out if you’re an investor or just part of the mainstream hysteria.
So here goes…
If you had 800 chances on the ASX to invest your money and make gains, would you invest or would you still sit on the sidelines?
That’s it. That’s my test. Ridiculously simple isn’t it?
If you answered, ‘I would sit on the sidelines,’ then I’m sorry, I just can’t help you. You’re a part of the mainstream. You’ve been caught up in the hysteria of the impending doom and capitulation of the stock market and the economy.
However, if you answered, ‘I would invest,’ then have I got some excitement for you!
The truth is in the last year there have been 800 different stocks that have made gains. Like I said before, that’s 36.6% of all stocks on the ASX. If you had invested in any of those 800 stocks you would have beaten the market.
Now I won’t lie to you, some of those stocks only made single digit gains over the last year. But 307 of them made between 10% and 50%. 151 of them made between 50% and 100%. And 215 different stocks made 100% or more.
Does that sound like ‘struggle town’ to you? Of course not.
Of the stocks that made triple figure gains, only six were worth more than a billion dollars. That means the other 209 that made triple figure gains had a market cap of less than $1 billion.
But here’s the really interesting point, of those 209 that made more than 100% in the last year, 199 of them had a market cap of less than $500 million.
If you’re an investor — and if you’re still reading then you probably are — then you should be looking to invest in stocks on the ASX with a market cap under $500 million. In other words, the best place to make big gains on the ASX is in small-cap stocks.
If you’re really keen to start investing in small-caps then you can get started right here by learning about three ‘shock proof’ stocks that I think will be winners in 2016.
No great reward comes without its share of risk
In 2016, just like it was in 2015, the best place to invest to make serious returns is the small cap end of the market. There’s no doom and gloom down here. It’s excitement, positivity, potential and market beating returns.
Now there’s a slight caveat to investing in small-caps. The biggest is that this isn’t the place to invest all your money. I say this because I know how small-caps work. And with the potential for big gains, comes an equally large level of risk.
You really should only be investing a portion of your portfolio in these stocks. The risk with these stocks is that you could also lose your investment. However, if you can bag only one or two big winners it could easily surpass any losses you might have taken elsewhere.
But if you’re an investor, and you’ve got the risk appetite for it, then don’t hesitate. Take a look at one of the most exciting segments of the market, small-cap stocks.
Ed Note: This article was originally published in Money Morning.