The growth potential of small caps has traditionally driven their outperformance relative to mid and large cap companies.
So, what gives? Is there a secret recipe? Is there a secret to successful investing in small caps? Is trading small caps something that only financial gurus can do? Well, the answer is both yes and no, but mostly no.
There is this cute little comparison often used to describe a typical Wall Street money manager. He or she is a person that competes in a game of darts with a blindfolded chimp. The long outstanding joke is that regardless of the blindfold, the chimp outplays the money manager eight out of ten times.
Well, no one can say this comparison is hardly flattering. The real question is, however, could it be true? Considering that most active money managers have difficulty spotting even the basic of market trends at times, it just might be.
The probability of a chimp picking better stocks than a million-dollar money manager covers the bad news. The good news is “Who cares!” Who cares about the stock picking abilities of an expensive money-sitter! It would certainly not be an investor who manages his own portfolio, and definitely not the investor who has a portion of it invested in small caps.
After going through two stock market meltdowns in recent years, there are no excuses for failing to do the necessary footwork. So, what are ordinary investors to look for?
In a nutshell, the first step involves finding out who runs a company and whether the company’s management is invested in the enterprise. The next step involves researching whether the company operates a sustainable business. And the third step is related to the second step; that is, investors should check whether a development-stage company operates within a niche market.
