Investors riding the small-cap tiger's back

A few days back, I had an interesting conversation with a senior mutual fund executive who has held a wide variety of investment management positions in the industry for more than two decades. As is inevitable nowadays, the discussion on equity investing turned inevitably towards small-caps. Like most sensible observers, my friend agrees that small caps are out on a limb. Not all of them, but many - perhaps most. Stock prices have run up to levels that are hard to justify, and there will be a reckoning at some point. Nothing unusual about this - this is completely normal in small-cap investing. Every single time there's a sharp run-up, it ends in a sharp descent. On the whole, things worked out, but only for those investors who chose their stocks well and managed other aspects like cost-averaging, diversification and asset allocation well. Those who follow the herd get herded out