Investing Made Easy – Buy One Stock and Outperform All Major Indexes
Sometimes after a financial setback investors decide that they would be better off if a “professional” takes care of their investments. They reason that buying and selling shares is complicated and that one has to have his eyes on our Bloomberg monitor 24/7. Nothing could be further from the truth.
Although fund managers will do their utmost best to increase your return, an individual investor has one major advantage over most Wall Street pros: the option to invest in small cap stocks. Most funds are simply too big to invest in companies with a market cap of less than $100 million.
Building a well-balanced portfolio of smaller companies can be very rewarding. In fact, both Warren Buffett and Peter Lynch, two of the world’s most successful fund managers in history, achieved their highest returns when their funds were small enough to buy small cap stocks. And while they continued to be successful as their funds grew, they never reached the returns from the early days.
Our Track Record lists our recommendations since 2003 and is proof that doing your homework in the small cap arena pays off big time. A total of 136 recommendations yield an average return of 210%.
One Essential Quality
Besides keeping abreast of your investments’ fundamentals to make sure you don’t miss an opportunity, there’s one essential quality that every investor needs: patience. Time is the most important part of the investing equation, and patience is key to achieving big returns. Several of our stocks tripled or quadrupled years after we initially recommended them.
As long as the fundamentals of the company are moving in the right direction, why bother selling? But, of course, it’s not easy. We sometimes get antsy or bored with a stock and want action. We forget that stock moves often come in spurts that are followed by long periods of digestion and consolidation. We all fall into this trap sometimes. So whenever you want to sell shares of a company, it’s important to take a step back and decide if it’s truly justified.
Outperform Major Indexes
The stock price of Acme United (ACU – $19.01), for example, the supplier of innovative cutting, measuring and safety products, has never jumped 50 percent in a couple of days. It will never build electric cars (or at least not that we know of), and it will never become the king of social media.
But it did work extremely hard the past years to diligently grow its business both organically and through acquisitions. And it paid off. The two-year chart below shows a comparison between the performance of Acme’s stock (blue) versus the three major U.S. indexes, Nasdaq (pink), S&P 500 (green), and Dow Jones (red).
Acme United’s stock price clearly comes out on top with a rise of 56.72%, leaving behind the three indexes and most of Wall Street’s favorites.
We don’t believe that the climb of Acme’s stock is going to end any time soon either. The Company generates lots of internal growth thanks to its new fishing tools brand Cuda, Camillus knives that did very well during last month’s SHOT Show and its first aid brands that reach record sales.
In addition, Acme is active in sectors which are relatively fragmented, leaving acquisition opportunities for a company that’s generating plenty of cash. Acme has proven it can handle and integrate acquisitions. In the past years, they’ve acquired Pac-Kit Safety Equipment, C-Thru Ruler, and First Aid Only, and turned them into profitable parts of the business.
By giving the Acme United example, we don’t suggest that you put all your eggs in one basket. It’s meant to show the power of small cap stocks and the influence they have on your portfolio.
It’s important to analyze any stock before you press the buy button and to have patience. You should always keep a close eye on the fundamentals of your investments, and ask yourself if it’s really worthwhile to sell a stock and buy a Wall Street darling instead.
An additional benefit of holding a stock is that you eventually get to know how predictable the management is, and that you get comfortable with the inherent risk. So why should you sell your shares if you expect growth, and know the risk?
And when you do face a financial setback, get back on your feet and move on. Remember that everybody goes through that once in a while, and especially keep in mind that nobody cares more about your money than you do.
|Smallcaps.us Advice: Buy||Price Target: $53.75||Latest Company Report (pdf)|
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