Small-Caps: just volatile, or are they also risky?

livemint.com:

Using volatility for wealth creation: Businesses do not function in a linear manner and often go through execution challenges because of multiple external factors. Resultantly, their underlying stock prices also go through various swings during this journey.

From an investors perspective, it’s extremely important to understand this non-linearity of business and factor this in the underlying valuations when buying a particular business. This itself helps it see through the volatile phase of the stock prices.

Another aspect that one may look at it while taking advantage of volatility is to stagger one’s investment and build it up. In the short run, stock prices do tend to behave erratic (volatile) for reasons beyond the business fundamentals.

For instance. if one looks at Titan’s journey from being a small cap company with a mere ₹1,018 crore market cap in 2005 to a staggering ₹2.68 trillion market cap today– this journey over the last almost 18 years has been laden with a lot of volatility with the stock price going down by more than 30% at least seven times! It would have been a missed opportunity for investors who found the small-cap Titan to be ‘risky’ because it fell more than 30%! Simply put, small-caps don’t generate superior returns because they are riskier.

They do so because they are more volatile. Pawan Bharadia is managing director, Equitree Capital Advisors.