To Small Cap Investors: Look Before You Leap!

With all of the cynicism currently surrounding the world of small-cap stocks, an article that I came across this morning begs a very interesting and important question:

“What if the defect isn't with small-cap stocks, but with small-cap investors?”

As a disclaimer, this is not a jab at you. It is however, something to think about when making future investment decisions.

In an article entitled: “The Case Against Small Caps” By Paul Elliott gives his take on why so many small-cap investors fall short of their financial goals.

Excerpt from article:

Why small-cap investors get creamed:

"Any finance professor can tell you why small caps are risky. Markets are illiquid, for one thing. Earnings are lumpy and less dependable. Capital is costly and hard to come by, especially when times get tough.

All true, but I'm not convinced that's why so many small-cap investors lose their shirts. It's more insidious than that. It's because they don't invest. Rather, they speculate on stock tips and high-risk story stocks with low-quality -- or worse, no -- real earnings.

It's that simple. Small-cap investors -- too many, at least -- ignore fundamentals.

If you don't believe me, ask yourself this: When was the last time you heard some guy pumping a small, unknown company at a party or on TV, and he wasn't focused entirely on the story? Hardly ever, right? "

Our Advice:

Do your due diligence. Sure, there should indeed be a place for “story” stocks in the speculative portion of your portfolio, but weigh the risks and rewards of investing carefully before you part with your hard earned money. I know this sounds quite obvious, but you would'nt believe how many people that I speak with now paying the price for not looking before the leap.