In the space of a week, we had significant corporate announcements for two of Under the Radar's research tips, resulting in share price increases of 50 per cent and 70 per cent, respectively.
IT software specialist Bravura Solutions announced it had received a "conditional" proposal from its long-term suitor, private equity group Ironbridge Capital, for 28¢ a share, while US-based oil and gas producer Antares Energy received a $300 million conditional offer for its assets in the Permian Basin - worth more than double its current market value.
There are risks in any investment, but when you are paying very low prices for assets that have relatively big potential, there is less that can go wrong if there are hiccups. You can have many of these types of stocks in your portfolio and a lot won't do anything. But for the ones that do, it will be worth the ride - as this corporate activity suggests.
The sharemarket goes up and down but, historically, it tends to rise more than it falls. This occurs in seven out of 10 years. If you average out its returns, you are looking at about 10.5 per cent a year. And your timing has to be good to generate even this return, even over a number of years.
To generate the sort of wealth to fund your retirement needs, you need to do better than this: you need to hit the ball out of the park on one or two investments. This is what Small Caps - which we define as companies with market caps of less than $300 million - can do.
Stocks such as the banks, Telstra and some internet companies have, until recently, traded at record high levels because investors perceive that there is relatively high certainty that their earnings will appreciate, delivering growing dividend income. These companies have high "price risk", which has been reflected in recent selling. If there is any softening of their earnings growth, their share prices are extremely vulnerable to big falls.
In contrast, what you see with Small Caps is "information risk". In these companies, their historic earnings performance can often bear little resemblance to their future earnings. Yes, there is risk in buying small caps. But there is risk in buying any investment.