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Readers reviews of Investing in Small Cap Stocks

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This is a very good book, but it has the fatal flaw common to many books dealing with fundamental analysis. It fails when it comes to controlling risk. The general advice is that if a stock you have bought falls in price then you should keep it. The assumption is that if you followed the analysis steps in the book that this will protect you against risk because you are less likely to be wrong and time will prove you right. Risk is negated by analysis, but not by money management. The book clearly states that if you get your timing wrong that you can rely on value to get you through. Not the best way to control and manage risk.

 

Apart from this, typical, short coming, the book has excellent coverage of how fundamental analysis and financial analysis is applied to the selection of small cap stocks. Australian readers should note that the definitions of small cap stocks includes those with a capitalisation of 2 billion $AUD. This is larger than what we mean by small cap, so many of the techniques are appropriate for mid-cap Australian stocks rather than small caps.

 

Small cap stocks are less well researched that other stocks, and this provides a window of opportunity for smaller investors. The authors believe this is one of the reasons for the way this sector outperforms the general market.

 

They also stress the importance of diversification, either through direct holdings, or by using mutual funds to achieve diversity. The reasoning is that diversity lets the winners balance out the losers so in the long run you are ahead. This is the only way to control risk when the advice is to buy stock and lock it up for 10 years. You really do have to hope that winners will outperform losers.

 

The book is excellent in its explanation and application of fundamental analysis. It is less useful when it comes to controlling and managing risk.

 

 

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