In honor of the two-year anniversary of Cabot Small-Cap Confidential, I’ve been bringing you a multi-part series with Editor Thomas Garrity. Tom has explained how he got interested in small-cap stocks and where he thinks the market is going. Today he’ll reveal some of his tried and true investing rules. I hope you enjoy it!
(You can read the previous issues here, here, here, here and here.)
Question: What are your tried and true investing lessons and rules?
Answer: I have a lot of investment rules, but two of the most important are: “Stick with it” and “Don’t be afraid to take profits.” As a small-cap investor, I tend to hunker down in an investment for the long term until institutional investors invest in it. I find that sometimes the waiting (which Jesse Livermore described as the way to make money) while anticipating the arrival of institutional investors can be both a little boring and thought provoking.
Let me elaborate. Small caps are thinly traded, which generally means two things: 1) Little trading activity, for the most part it’s you and a few other stock research enthusiasts holding the stock; 2) Since few trades occur in these stocks, the shares tend to trade with greater volatility than say mid- or large-cap stocks.
A lot of investors will sell out of a position because a stock is not moving favorably or quickly enough. The tragedy is that we’ve done all of the research that goes into finding a qualified investment and the moment the stock moves from its slumber past our purchase price, investors often sell out, missing out on tremendous moves in these stocks.
But I think you should stick with the investments that you’ve worked so diligently to research. Know that small-cap stocks can be finicky, but that eventually you’ll get paid–in some cases many fold–for your research work and tenacity.
When investors make big gains in their portfolios, they often don’t want to sell out their winning stocks. But not taking profits is a foolish mistake. You’ve got to pay yourself for your work. Whether you’re inherently stubborn or you’ve just acquired a taste for greed, you need to detach yourself from this dangerous trait.
The best advice I can give is, “Collect rent for time well spent.” I can’t tell you how many times I have the urge to take the multi-home run stock for just one more at bat. But taking another swing for more gains is risky business and you may well end up losing the lion’s share of your profits or worse.
Question: What else you would like to say to subscribers regarding small-cap stocks?
Answer: Small-cap stocks will continue, in my view, to be the superior investment over time. Every great company that starts out small in business and eventually flourishes to become a large company with origins in venture capital. Somewhere along the line, private investors provided the necessary funding for the company to grow. Investors will continue to pay for growth, as that’s the true spirit of investing. The markets may re-evaluate what financial metrics matter most for stock selection, but growth will always be in style.