Volatility - Opportunity and Risk
The broader markets, after reaching record highs earlier this month, came under severe selling pressure last week. Many small stocks succumbed to the wave of selling. In this type of environment, it's very important to keep perspective of why you bought specific companies in the first place. Are those reasons still valid? Has anything changed to warrant a sell-off in a particular name? Often times, in the short-term, small stocks move for reasons beyond the merits of the individual companies themselves. If it's broad market selling pressure that's wreaking havoc on a position, but the merits of that particular company are still valid and improving, this type of volatility can present a great opportunity to accumulate shares at a discount. On the other hand, if the fundamental picture has changed for a particular company, it's time to take inventory of the reasons you originally picked up the shares. Has the story changed to the point that your original reasons for ownership are no longer valid? In such cases, you may need to consider selling the position. Often times though, the ills of the broader market are relatively unrelated to the potential of smaller stocks. Smaller stocks are typically growth oriented, taking market share from huge market opportunities. This is vastly different than a Fortune 100 multinational trying to maintain large market share on a global basis. Because of this, smaller stocks can often weather the storms of the broader market and bounce back very quickly. So, bottom line, do your due diligence, know why you own a position, keep an eye out for shifting dynamics, and don't let the volatility of the broader market shake you out of the right positions.