When it comes time to select the stocks for each issue of the SmallCap Informer, we look at a combined list of currently covered stocks and all of the ideas on our watch list, and then select the best candidates for growth, valuation, and projected return. We weed out currently covered stocks that might be “on probation” (where we’re waiting for the company to deliver better results) and stocks that have been featured recently in SCI.
We don’t expect that subscribers will purchase every, or, even, most stocks that we profile in the newsletter, but we also want to draw attention to the fact that the best opportunities for a portfolio right now might be a stock that‘s already in the portfolio.
Investors tend to ignore the stocks in their portfolios when they have funds to purchase new positions. Sometimes investors don’t want to “increase the average basis” in a particular stock in which they have lots of gains, since that would decrease the gains as a percentage of the total investment. Other times, a stock has declined in price, but investors are fearful of committing cash to a “losing” position, even though that stock’s valuation and total return metrics look more attractive now, and buying more shares would decrease the average basis in the stock.
To be sure, sometimes “averaging down” as a strategy won’t work, and investors need to remember that they can use that approach until they have lost nearly all of their investment.
Each month in the SmallCap Informer, we seek out and present two ideas for subscribers from the small company space. But not every stock we present is new to the newsletter. In some issues, we may revisit a company (and sometimes two) from the current coverage list.
But in many cases, one of the best new purchase decisions that can made is to buy more of what is already owned. These companies are known quantities—the initial research has been done, and developments since the initial purchase have been digested.
This can be hard to do, since shiny, new stocks are so very alluring, with their tantalizing prospects of unlimited upside. Compared to the old friends in a portfolio, the new candidates draw investors in. Over time, this habit of buying new companies leads to building a collection of stocks, not a portfolio.
A better strategy is to employ the “challenge” concept. Challenge new ideas by comparing them to existing holdings, and replace underperformers with stronger candidates. When new funds are available to invest, compare and contrast new ideas to current stocks, and buy the winner.
Basic principles of portfolio management remain in place no matter how you add or replace stock positions.
Just remember that your next winning stock might be one already in the portfolio.
Reprinted from the May 2021 issue of the SmallCap Informer.
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