[Editor’s Note: Due to a technical issue, I can’t send you today’s Money Morning newsletter. I’m sorry for the inconvenience. Full service will resume tomorrow].
Cheers, Kris
We’ll be honest. This falling stock market has us licking our lips.
The S&P/ASX 200 has dropped 6.2% in two weeks.
And yesterday the index had its first 100-point fall since 3 October last year.
The ASX Emerging Companies index has done even worse. It has dropped 17.1% in seven weeks.
That’s bad news if you hold small-cap shares, but great news if you want to buy beaten-down stocks on the cheap. It’s also why we suggest you only invest a small part of your portfolio in these high-risk punts.
You can make or lose a big chunk of your investment in a very short period of time.
In that case, you may wonder why you should invest in small-cap stocks at all, if the global economy is as bad as we say it is.
The answer is simple.
First, while we believe the global economy is going through a necessary bout of deleveraging that will ultimately lead to deflation. Central banks and governments will fight tooth and nail to prevent that.
They want inflation. And that likely means periods of rising asset prices…followed by periods of falling asset prices as the inflationary policies fail, and deflation takes hold again.
Second, despite market moves and the threat of recession (or depression) most firms carry on doing business. And most entrepreneurs carry on thinking of new ideas.
New ideas are what small-cap investing is all about.
It’s about entrepreneurs (and investors) seeing the chance to make a lot of money, regardless of what happens to the broader economy.
That’s why we say, if you’re after a punt, buy small-cap stocks now. You can take out a no-obligation trial to our small-cap newsletter, Australian Small-Cap Investigator now. Click here for details…
For some time we’ve told you to ditch your blue-chip growth stocks. Today the Aussie blue-chip index is at the same level as it was in July 2009. That’s almost three years with no growth.
And for long-term investors, we don’t see that changing.
But small-cap growth stocks are a different kettle of fish. Most of them don’t have any revenues and don’t earn a profit. These are the riskiest stocks on the market.
It means when trouble hits the economy, small-caps fall the most. But here’s the thing…if an oil stock finds oil, or a gas stock finds gas, or a technology stock develops a game-changing product, then these small-cap stocks can soar higher regardless of what happens in the market.
Bottom line, it could be that the world economy is entering the deflationary cycle that should have happened in 2009. Government stimulus programs and central bank money-printing only delayed the inevitable.
But don’t let that stop you investing in stocks, because you still need to grow your wealth. And when stocks are hit this hard and everyone is rushing to sell, this is often the best time to invest.
Just make sure you hold cash (plenty of it), reduce debt where you can, hold gold and silver for security, and stick with a few reliable dividend paying stocks for income.
What’s left over, use to snap up small-cap stocks panicking investors are selling at bargain-basement prices.
Cheers,
Kris.
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