As someone who invests a lot in small caps and has seen many up and down cycles, my take is that corrections should be expected and welcome and NOT feared by retail investors.
Thing with small caps stocks is that when they are in a bull run and making new highs every week or month, no one stops and wonders if it’s normal for a stock to give 2-3x returns every year when underlying earning growths are nowhere close… Or how much story market is pricing in and how much of price is just bubble.
In bull markets many take those crazy stock prices rises as a given and not a matter of concern. And when money starts exiting at insane valuations we feel scared (instead of being happy) thinking something is wrong with the market.
So it’s a problem of expectations. Mean reversion is par for the course for stocks and over a period of time, price corrections will happen for every stock to reduce gap between valuations and earning growth. At the same time companies with earning growths will never disappoint their investors regardless of the market cap, interest rate cycles, fed actions, liquidity etc.
So if one is confident of their portfolio companies doing well on earnings, they need not be afraid. Even if the stocks correct they will recover quickly to make new highs. However if one just bought the stocks because they were running and big (or dumb) money was chasing them, then one needs to be very cautious because without conviction fear can take over very quickly resulting in all sorts of reaction to news flow.
I generally welcome corrections because it allows me to buy more of the stocks that I have in my portfolio and increase my allocation at lower prices in case I missed out on betting big on a good opportunity.
| Subscribe To Our Free Newsletter |
