Don't fear the volatility: How to choose the right small-cap stock for low risk and high returns
Small-cap investing epitomises the essence of stock investing. While this sounds like a provocative assertion, designed more to cause a stir than to be taken literally, it’s something I believe in. I’m not dismissing picking major stocks like Infosys or Innterglobe as less than genuine equity investing.
However, to experience the journey of owning and growing a business, one should invest in a small-cap stock and watch its evolution into a mid cap and, eventually, a large business. Let’s consider the double-edged sword of small caps —volatility. It makes these a high risk, high-reward proposition.
At an instinctive level, we all recognise that the fluctuation in stocks is what adds to their allure.
While some stocks may outperform and others might underperform compared to their past, this unpredictable nature is what renders them both risky and potentially lucrative. The real reward lies in savvy investing, especially in stocks poised for significant future growth. It’s essential to acknowledge the intrinsic link between risk and returns.
We know that exceptional returns aren’t generated from risk-free investment choices. Take fixed deposits. If you work hard at choosing the best bank fixed deposit, you are not going to generate significantly more wealth than if you were to pick at random.
If I were writing about choosing the best risk-free deposits, no one would read a word of it.
There is genuinely a very high degree of uncertainty about smaller companies’ future. Many of these will never amount to anything. Many will fail and disappear.
