Buy and Hold Investing Is Dead: Why Small Caps Work for Active Traders

I recently had the opportunity to get to know Ian Wyatt from, and his small-cap (and overall market) knowledge is outstanding! He's written the below article just for Trader's Blog readers, and per my request has made a special offer to those interested in learning more about small-cap stocks. Please feel free to comment with questions, opinions, and insight!

Conventional wisdom told investors that buying great companies at any price and holding them to eternity was the surefire way to growing a college or retirement fund. After all, during a secular bull market like that experienced from 1982 through 2000, when the Dow soared 1,409%, is was an indisputable strategy for almost guaranteed profits.

However, the days of “buy and hold” profits are now a distant, but fond memory. With the end of the century came the end of the 18-year secular bull market, the greatest creator of wealth in the last hundred years.

So today we enter a period of volatility where successful investors will be those who are willing to buy and sell stocks, turning the average investor into an active trader. MarketClub Trader’s Blog readers certainly know that the way to reap profits in this market is through buying and selling, not buying and holding.

Small-cap stocks, those companies with market capitalization's below $2 billion, have often been criticized as being more volatile than large-cap stocks. This was certainly evident in the steeper decline and more significant rise since the March 9 lows for the Russell 2000, compared with large-cap indices such as the Dow and S&P 500. Traders often embrace volatility as an opportunity to profit from large moves to the upside or downside.

Small-cap stocks offer traders and investors alike an opportunity beyond volatility. Small-cap stocks are often overlooked by the vast majority of institutional investors because they are deemed too small. And most individual investors think small-cap stocks and penny stocks are one in the same, and head for the exit when the topic comes up.

Traders seeking to capitalize on the fastest moving equity class must consider small-cap stocks. These companies are often overlooked, and remain undiscovered despite strong fundamentals and technical indicators. And for the individual seeking quick gains, these unknown stocks can pop quickly once they become noticed by institutional investors, who begin buying up the stock.

One strategy for successfully trading small-cap stocks is to screen for stocks that are fundamentally strong and have just released record financial results. Strong financial results often put a unknown small-cap stock on the map, attracting mutual funds and hedge funds that invest in less well known, but proven companies.

Individual investors and traders who get in early can buy up shares before institutional investors start buying. Since institutional investor activity is reported to the SEC, investors can track how much of each stock they’re buying. Simply looking at share volume can also provide clues, since a large increase in share volume likely indicates institutional investor purchases.

Many small-cap stocks in the early stages of institutional investor accumulation will continue to perform well over the intermediate to longer-term, assuming that the financial performance continues to justify a rising valuation. However, these small-cap stocks on the move similarly provide short-term trading opportunities for the astute active trader.

In my recently released book, The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks, I share my secrets for finding and profitably investing in small-cap stocks. My strategies can be used by both active traders and long-term investors, and in this volatile market can be productive for locking in quick gains. Just because we’re in a secular bear market, it doesn’t mean there aren’t profits to be made today.

Ian Wyatt

Please take time to check out my book The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks and receive an EXCLUSIVE special offer for Trader's Blog readers only!