Here at Strawman, we like to poke around the lesser known corners of the market. And why not? There are lots of hidden gems to be found.
In fact, there’s plenty of things to like about so-call ‘small cap’ stocks.
- More growth potential
- Less competition from other investors
- Less rational pricing (more opportunity to find significant mis-pricings)
- Better access to management
The compromise we accept, however, is that this area of the market tends to be ‘riskier’. Or so we’re told.
If, like some, you define risk as share price volatility, then there’s some truth to that. At least on a day to day basis. Nevertheless, does that mean that big ‘blue-chip’ stocks are immune to wild swings in price?
Facebook (NASDAQ:FB) — one of the largest companies in the world — is down 70% over the past year, and last week lost one quarter of its value in one single session!
Even if you want to avoid tech, and focus only on the bluest of blue chip Aussie stocks, you’ll find plenty of ‘risk’.
Woolworths (ASX:WOW) is down 20% over the last year. Wesfarmers (ASX:WES) is down 27% from its January high. Alas, even the almighty banks have been far from a ‘safe’ long-term bet — ANZ (ASX:ANZ) shares are down 30% from where they were at the start of 2015. Not even seven years worth of dividends are enough to make you whole.
The point here is not to selectively rag on some of the ASX’s golden geese, but rather to point out that bigger isn’t necessarily better. And that share price volatility is a stupid measure of risk.
Uncle Warren, as usual, defines it best:
Indeed, if you think about it, we should welcome share price volatility with open arms. It offers us the opportunity to buy shares at very attractive prices.
The more volatile the better.
Not everyone will agree. And very few can muster with the (significant) emotional fortitude — and patience — required to take advantage of sudden and significant price swings.
But that’s exactly why the smaller end of the market offers such rich pickings for those who can.
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