Small caps can be volatile. Sudden, sharp price declines cause lots of anxiety, and though many investors exhibit the requisite patience needed for smaller companies to develop their "story," numerous others find it hard to while away the hours until the market finally catches on. We're lured in by the success stories of today's blue chips, which were once small caps shaking up the marketplace. We want those same kinds of returns. Today. Immediately, if not sooner.
As one of the duo of guest analysts at Motley Fool Hidden Gems who recommended semiconductor chip tester company FormFactor
Hidden Gems has set an admirable goal for its members: to find top-notch small caps before everyone else does and then sit back and wait for the herd to catch up. For many investors, the waiting is sometimes hard to do.
Breathing easier with the Breathe Right maker
Looking back, you might say that buying an up-and-comer like CNS
But consider this: The ride CNS took was not a smooth, ever-upward trajectory. For most of the first year after it was recommended, CNS was a loser. It was down 11% after one year. Only in the second year of ownership did the stock price start to move forward, running as high as $31 a share. With its relatively new FiberChoice digestive products selling well and acquisitions always a possibility, the company now looks like a long-term winner to everyone.
Yet just before it ran up, people wondered whether the stock was a dog after all. Some sold a portion of their holdings as they tired of waiting; others sold all, hoping to get out if they could just break even. As subsequent history has shown, those were foolhardy moves that led to their getting out near the bottom.
History repeats itself
On the Hidden Gems dedicated discussion boards, there's been some impatience expressed lately over a number of the recent recommendations that are currently underwater. Some have questioned the quality of the picks because there hasn't been an immediate jump in their stock price. So how long is too long to wait for a stock you own to make its move?
Well, if you were an investor in NutriSystem
Similarly, Motley Fool Stock Advisor pick Quality Systems
Getting in before the beginning
I can't tell you that three months, six months, or one year is when you should expect your stock to run. What I can say is that the longer you hold your stocks, the better off you're bound to be. When you're buying into superior companies, then price moves on a day-to-day basis do not tend to accurately reflect the operating performance on a daily basis.
FormFactor has been up by as much as 50% and down by 10% since it was selected. It's currently up 23% from where it was recommended. But up, down, or sideways, the short-term moves are of little concern. It's the long-term story of this industry leader that assures me we've invested in a good business with a bright future.
Every investor should want to locate good growth prospects, establish positions early, and wait for the analysts and institutions to finally discover what we've already found. Sure, we want those profits today, but allowing the story to develop -- like giving the market the chance to see what CNS had to offer -- is what has helped Tom Gardner and the Hidden Gems team beat the market averages by 16 percentage points since the newsletter's inception in July 2003. Waiting is sometimes difficult, but it's the surest way to harvest the greatest returns.
And right now, a 30-day free trial to Hidden Gems lets you reap the rewards of the newsletter's six-month review, where all active recommendations are analyzed for their current attractiveness. There's no obligation, and you get full entree to the picks, the Scorecard, and the discussion boards. It'll be time well spent. Try it today!