{"id":55626,"date":"2014-08-07T14:10:38","date_gmt":"2014-08-07T18:10:38","guid":{"rendered":"http:\/\/countingpips.com\/?p=55626"},"modified":"2014-08-07T14:10:38","modified_gmt":"2014-08-07T18:10:38","slug":"the-two-biggest-mistakes-that-small-cap-investors-makeand-how-you-can-avoid-them","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2014\/08\/the-two-biggest-mistakes-that-small-cap-investors-makeand-how-you-can-avoid-them\/","title":{"rendered":"The Two Biggest Mistakes That Small-Cap Investors Make\u2026and How You Can Avoid Them"},"content":{"rendered":"
August 7, 2014<\/div>
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By MoneyMorning.com.au<\/u><\/a><\/p>\n

Earlier this week in Money Morning,<\/em> I revealed my four top tips for small-cap investing success<\/a>.<\/p>\n

You can think of them as your insider’s guide to big capital gains.<\/p>\n

Investing in small-caps<\/strong><\/a> is the best way that you make money in the stock market.<\/p>\n

But you should know that small-cap stocks bring danger as well as opportunity.<\/p>\n

Unseasoned investors fall into traps.<\/p>

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You might find that losing money in the stock market can be educational. Sometimes it’s even character-building. But losing money is rarely fun, and it’s often an expensive education.<\/p>\n

I want to give you that education without the price tag.<\/p>\n

Today I’ll show you the two biggest mistakes that cost small-cap investors real money. The first mistake comes from backing a loser…and the second mistake comes from missing a winner.<\/p>\n

Whether you’re a beginner or a veteran, I trust you’ll find these warnings handy.<\/p>\n

Warning #1: Don’t let losers run<\/strong><\/h2>\n<\/p>\n

This is a simple warning, but it would amaze you how often professional investors ignore it and blow themselves up.<\/p>\n

Let your winners run, and cut your losers short. You achieve this by setting and sticking to a trailing stop-loss level.<\/p>\n

That’s a stock price where you’ll admit that your idea hasn’t worked and you want to move your capital onto more exciting opportunities.<\/p>\n

Depending on your tolerance for risk and loss, you might set a trailing stop loss 30%, 40% or 50% below your buy price.<\/p>\n

We do this so that when we take a loss, we take as small a loss as we can.<\/p>\n

It ensures that if I make a huge mistake and recommend that you buy a total dog, the stock market <\/a>won’t wipe you out with a 100% loss.<\/p>\n

Once you’ve identified an interesting stock, here are the key points: Establish your buy price, your sell price, and set your trailing stop-loss. This takes emotional anchor points out of the picture.<\/p>\n

You’ll determine those points based on what you think the company’s worth and your appetite for risk. Those are personal decisions that only you can make.<\/p>\n

This is the best way to lock in speculative gains when you make them, and limit losses when a story doesn’t play out.<\/p>\n

Of course, I watch all of our stocks every day…and I don’t let losers run.<\/p>\n

Warning #2: Small-caps — not low-priced stocks — hold the keys to riches<\/strong><\/h2>\n<\/p>\n

Here’s the single biggest threat to your success as a small-cap investor: obsessing about share price instead of position size and percentage gains.<\/p>\n

Most investors — maybe even you — have an unhealthy fixation on share price. And that’s a problem.<\/p>\n

Media and society have programmed Aussies to obsess over share prices. You see them in your lounge room every night, just before the weather report on the news.<\/p>\n

That puts a bias in people’s brains that a value of dollars per share north of $20 or $30 must be good. I’m talking about stocks that hog the press coverage, like BHP Billion Ltd [ASX:BHP]<\/strong> or Commonwealth Bank of Australia [ASX:CBA]<\/strong>.<\/p>\n

That same bias leads people to think that dollars per share south of $1 must be a bad thing.<\/p>\n

Well, that’s bulldust. <\/p>\n

Sure, if you own a stock, you want its value to travel as far from zero as possible.<\/p>\n

But there’s a big difference between a low price and a small company.<\/p>\n

You might not realise this, but a company can determine its share price with a simple vote.<\/p>\n

When a company changes its number of shares outstanding (a move called a split or reverse split, depending on whether the number goes up or down), the share price changes too.<\/p>\n

For example, a company could double the number of shares it has outstanding, leaving each share worth half its original value. Or the board could decrease the number of outstanding shares by half — and double the price of each share.<\/p>\n

That doesn’t change your investment in the company. Whether you have 100 shares of a $1 stock or one share of a $100 stock, your position is worth $100.<\/p>\n

The share count is a simple lever for a company’s CFO to pull. What companies can’t control is their total value…their market capitalisation.<\/p>\n

That’s the number you should pay attention to if you’re trying to identify a small-cap opportunity.<\/p>\n

In other words, if you think of a company as a pie, then each piece of the pie is a share.<\/p>\n

A company can vote to cut each share into more pieces, but that doesn’t create more pie — just smaller pieces.<\/p>\n

The only way to create value for shareholders is to bake another pie. And it’s much easier to achieve big percentage gains in value from a small base than a big one.<\/p>\n

At last count there were 82 large-cap Australian stocks<\/a> (companies worth more than $1 billion) with share prices under $5. None of them are small companies.<\/p>\n

But by only focusing on price, you could fool yourself into thinking they were.<\/p>\n

It’s normal to get fixated on a stock’s share price — it’s the first thing you see when you pull up a quote, after all. But price isn’t what matters.<\/p>\n

Small companies with explosive growth potential should be your focus, no matter their price.<\/p>\n

Some of our hottest tips trade for just cents on the dollar. But we have just as exciting small-cap stocks on our buy list currently trading for well over $5 per share.<\/p>\n

It’s these small-caps…not low-priced stocks…that hold the keys to riches.<\/p>\n

Tim Dohrmann+<\/a>
\n<\/strong>
\n Small-Cap Analyst, Australian Small-Cap Investigator<\/em><\/strong><\/p>\n

Join Money Morning on Google+ <\/u><\/a><\/strong><\/p>\n

The post The Two Biggest Mistakes That Small-Cap Investors Make\u2026and How You Can Avoid Them<\/a> appeared first on Stock Market News, Finance and Investments | Money Morning Australia<\/a>.<\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nBy MoneyMorning.com.au<\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Earlier this week in Money Morning, I revealed my four top tips for small-cap investing success. You can think of them as your insider’s guide to big capital gains. Investing in small-caps is the best way that you make money in the stock market. But you should know that small-cap stocks bring danger […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-55626","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/55626","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=55626"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/55626\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=55626"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=55626"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=55626"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}