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The Dark Side of Small Caps, Our 20th Anniversary and More... - Views on News from Equitymaster

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The Equitymaster Research Digest

The Dark Side of Small Caps, Our 20th Anniversary and More...
Apr 22, 2016

A 95% fall in price is downright ugly, isn't it? However, our hearts should go out to the guys who invest in these stocks after they have fallen 90%. They believe that the worst is behind them, that the stock simply can't fall any further. But what looks like a small move from a decline of 90% to a decline of 95% is actually a fall of 50% for the guys who entered after the stock fell 90%.

The lesson? Don't blindly get into a stock because it is down 90%. If the fundamentals aren't good, the small change from a 90% to a 95% decline can actually destroy a lot of wealth.

These thoughts crossed my mind as I was checking the price of Tree House Education Ltd, one of our failed Hidden Treasure recommendations. The stock is in a downward spiral, and If the trend persists, it could well enter the '95% club'.

When we realised our mistake in Tree House Education and finally asked subscribers to exit, we thought the timing could have been much better. After all, our subscribers lost 29% on our recommended price. But when we look at the current price, we realise it is never too late to get out of a bad business. Had we held on, investors would have been down another 55% from the exit price.

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