It’s Christmas Eve everyone! Why the heck are you reading Money Morning? Seriously though, if you are reading this — I’m kind of hoping you’re not — go and have fun with your family.
Or if you’re sick of your family (as many are by Xmas eve) then sit back for some enjoyable reading.
Here’s the thing, at this Christmas time we often sit back and reflect on the year now (almost) behind us. We do this because, as human beings we love to celebrate a milestone. Anniversaries, birthdays, Christmas, New Year’s Eve, any time we can put a period of time into a celebration, we do.
But the reality is there’s absolutely no difference between the 31st of December and the 1st January from one year to the next. The only thing that changes is our perception that something has changed.
That’s why I’ve always been a bit miffed with New Year’s resolutions. Using a change of year to make all new decisions in life…I don’t get it. Just do it anyway. Why wait until the New Year?
Funnily enough, one of the most common resolutions in the New Year is to spend less and save more. What’s interesting is that, according to Forbes, just 8% of people actually ever achieve their New Year resolutions.
That means there’s a lot of people that aim to spend less and save more, but don’t. The thing is, it’s not hard to do. You get paid, you transfer some money to your savings and then use the rest for spending.
The hard part is to curtail your habits, to stop wasting money on frivolous items. The saving part is easy. The not spending as much part is hard.
Be short, be long, but invest!
I put this down to ‘short-termism’. That means people inability to think about the long term, and only see the short term.
If you only look at the short term then you probably will spend more. The ‘I might not be here tomorrow’ mentality will often lead to that outcome. But if all you see is short term, then you’ll possibly miss the bigger picture.
For example, a short-term view in 2016 would have been to sit on the sidelines. It wasn’t a very good year was it? Lots of turmoil, political uncertainty, Trump, a struggling Aussie economy, and Europe on the brink of implosion.
But believe it or not, the Aussie market it currently up 5.53% year to date. Now that’s not exactly shooting the lights out. But it’s still a positive return. It’s certainly better than you will have got from your cash savings account.
It’s been a tumultuous year for small-cap stocks too. But even the ASX Small Ordinaries index is up 6.09% year to date.
But as I’ve been saying since the very beginning of the year, the ASX is a market for stock pickers, not index investors. If you only had short-term vision and weren’t invested you might have missed out on gains that could have changed your investing life.
For instance, mining services company NRW Holdings [ASX:NWH] is up over 632% since the beginning of the year. Bradken Limited [ASX:BKN], another mining services company, up 557% year to date.
These are just two examples of stocks that have shot the lights out in a short space of time. They’re proof that, even while the general sentiment short term might be negative, there are incredible gains up on offer.
Of course, there’s the flipside to the coin too.
If you only have ‘long-termism’ you only focus on the long term. This can often lead to missed short-term opportunity, as the long game is your sole focus. It can also lead you to common misconceptions about the markets.
For example if all you focus on is the long game you might have been invested, but in less risky, ‘blue chip’ stocks. Companies that everyone knows about like BHP Billiton [ASX:BHP], Telstra [ASX:TLS] or Commonwealth Bank [ASX:CBA].
After all these companies have been stars, long term. Or have they?
CBA is only up 74% over the last 10 years. BHP is actually down 4.5% over 10 years. And Telstra only shows a gain of 21.78% over 10 years. Yes, they’ve all paid dividends over time, but not even close to an amount that offsets those pitiful long term gains.
Over that time you will have missed opportunities like TPG Telecom [ASX:TPG], which rose 685% (even after their price halved this year) in 10 years. Or a stock like REA Group [ASX:REA] up over 936% in 10 years. These are two examples of stocks — now worth billions — that started off as small-cap companies.
That’s a common misconception by ‘long-termers’. They often neglect small-cap stocks because they’re too ‘risky’. When the truth is the real risk in play is that your ‘blue chip’ investments don’t perform long term like you think they should
Be smart — invest, but with a mix of strategy
Neither extreme is a good position to solely take. You need a mix of short and long-term view. This is particularly applicable when it comes to investing. And if you want to really build your wealth then you need to ditch the idea of being short term or long term.
Be both. Be smart. Invest, but take a multi-strategy approach.
I think that every investor should have exposure to small-cap companies. Some people think that’s anything under $1 billion. Some say under $500–750 million. But I think the best ones are worth less than $250 million — for now. There are stocks on the ASX today that, in 10 years could be the next REA Group or TPG Telecom.
You should look for those companies that have that long term potential that perhaps the market doesn’t fully recognise today. But you should also have exposure to stocks that can capitalise on opportunities that might exist next year. Stocks that have the potential for explosive short-term returns, like Bradken or NRW have this year.
That’s a mix of investing and trading stocks. Of course this approach and finding stocks to double, triple, decuple your money comes with risk — all investing in stocks comes with risk.
But you’ve got to ask yourself a simple question. Is the risk of investing now bigger than the risk of doing nothing and watching everything in hindsight?
Is 100% of nothing more appealing than the potential to see returns on something? Unlikely. That’s why, if you’re going to do anything in 2017 then you should be investing in stocks. And in my view one of the best sections of the market to do it is in Aussie small-cap stocks.
PS: It’s not always easy to find growth among billion-dollar stocks. Unless they can significantly increase earnings, you’d be lucky to get double-digit returns. That’s why some investors prefer the smaller end of the market.
Small-cap stocks are a riskier investment. There is no running away from it. But they can potentially grow earnings 10-fold in a short space of time.
Small-cap specialist Sam Volkering has been on the other end of small-caps running up 1,000% or more.
So far in 2017, Sam hasn’t recommended a losing stock yet. In his advisory service, Australian Small-Cap Investigator, his top three active investments are up 304.57%, 466.04% and 1,624.49%.
To find out more, click here.