...Back in the US, the largest economy in the world, things are still going pretty well. Sure, interest rates rising soon were the lead story before China, but when investors pulled the plug in the China market, a sell off from historical highs would be a natural occurrence. So, in reality nothing much has changed in the US except for major margin calls - so precipitous selling is not only China fears and interest rates rising expectations, but serious margin calls.
MicroCap investors should always take into consideration the huge drops in the larger cap markets for a few reasons. Number one reason is bargain hunting. What have you been looking at that you were waiting for the right time to buy? I bet that the price is in the neighborhood you were looking for around now. That’s indicative of using opportunity to buy just like run ups are a good opportunity to sell. Number two reason is in big sell offs of the big board and NASDAQ, smart money sits and waits for opportunities to come to them so placing orders nearer to the bid rather than buying middle to ask is an age old strategy. Number three is to look for good news coming out of followed symbols because chances are that normally the good news would provide an incentive for investors to jump in, but confusion, worry, and risk averse strategies cause many investors to freeze in the headlights. So buy good news when indices are dropping because once the dust settles the buying will catch up to the good news eventually and you had the opportunity to buy when everyone else was frozen.
Margin calls can sometimes drill deeply into investor’s portfolios. I am not a big fan of margin. Margin calls are a worst case scenario especially if you are fully invested. The liquidation of stocks by custodian firms is ruthless leaving you with less control than you would hope for. Determining what to sell to cover margin calls often times forces investors to sell stocks not owned on margin, which in general are most MicroCap stocks, which generally are not marginable. Going to cash is easy if the liquidity is there on MicroCaps, so dumping to cover margin calls is just par for the course. As MicroCap investors, we get to see lower prices for no other reason than margin calls so following a company closely makes you aware of the good, the bad and the ugly. So, as Franklin D. Roosevelt said in his first inaugural address: “Only Thing We Have To Fear Is Fear Itself.”
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