A note on current market volatility from Maj Soueidan, GeoInvesting co-founder
Being a micro-cap investor after the 2008 recession has been challenging. There is no doubt that the investment landscape has changed over the last 7 years. I believe the market has “changed,” rather than “evolved.” Evolving would be a good thing – “evolving” generally means to grow, advance and progress and it’s generally viewed as a positive, but “change” can be both positive or negative.
The fear of the 2008 recession is etched in investors’ memories. When combined with the rapid growth of volatile ETFs, manipulative high frequency trading practices and policy that encourages “addict-like” fixes to the Fed stimulation of the markets, and we’ve changed the way many investors look at stocks.
What you essentially have is two extremes. The fear eliminated many investors that historically invested in micro-cap names, leaving us with a new army of investors with very short-term expectations searching for “sexy” stories with high valuations. At the same time, investors that once invested in micro-caps moved to large caps, which helped push up the valuations of risk-averse blue chip equities, which now trade at multiples well above their growth rates. At the same time, great undervalued micro-cap stories went ignored.
During this time there have been some very good micro-cap performers, including many that we have invested in. However, rallies in the space are not as broad as I would like them to be. Liquidity has also been greatly reduced. Owning a diversified portfolio of many micro-caps has probably hurt your performance overall lately. Nothing tells this story more than observing one of our screeners that highlights the performance of our selected long micro-cap names in which we took long positions. At their peak, the average return was over 30%, with half over 50%. The average return now is near even. This proves that good stock selection can be rewarding, but that investors have had a very short-term time horizon.
I often receive questions from other micro-cap investors asking when micros are going to regain some lost glory. Peter Lynch taught us that making one directional market predictions is a usually a futile process, so I will not try and do that today. What I have been saying since the beginning of year is that the global uncertainty could be the catalyst investors need to seek out home grown micro-caps that don’t directly reflect what currencies, China or blue chips are doing.
I am hopeful that the market correction we were long overdue for, where big caps are getting obliterated, will drive this point home. In fact, last Friday there was moment when the micro-cap indices we track were actually green during one of the bloodiest days on Wall Street. We are getting a micro-cap wish list ready to share with subscribers. For those who still prefer to invest in big caps, please visit our buy on dips big caps screener, which includes companies with reasonable valuations that we may look to buy on steep pull backs.
To conclude, here are the points I want to leave investors with:
- I believe lower liquidity means less traders and more long term focused investors
- At some point, as we exit volatility, value will matter again
- There was a period during the dot.com era when micros with value were ignored in favor of high flying dot.com stocks. There is only so much money to go around. When the bubble finally burst, investors found value in micro-caps
- This market scenario has often led to outsized returns for our micro-cap portfolio
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