The difference between microcaps and large-cap stocks is huge. Some of the smartest analysts and portfolio managers in the world invest in the top brass large-cap companies. Billions of dollars are traded per day. Well known companies that thousands follow. All of the chatter on social media. “Did you hear that Facebook is down 26% today?” type chatter.
With microcaps the audience is much smaller. Maybe one or two analysts follow the company. Billionaire hedge fund mangers don’t play in the space as they are priced out. These are not well known companies and the chatter on social media consists of crickets. “Did you see that Scott’s Liquid Gold is down 26% today?” is not something you ever hear and you probably don’t even know what Scott’s Liquid Gold does.
Microcap land is the wild wild west of investing. It is not hard to find companies trading at 2-3x earnings in the space. Companies trade under liquidation value often. There are scams. Fake companies. And OTC fallen angels that no one cares about. If you want to get an edge in the microcap space you need to do your own research as the sell side typically does not cover companies with a market cap of $5 million.
If you can do your own fundamental analysis, you can gain a real edge investing in deeply undervalued microcap stocks. As Warren Buffett said:
“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”
Facebook posts crappy earnings, I don’t care. Amazon knocks it out of the ballpark, I don’t care. Snapchat falls 25% then rallies 60%, I don’t care.
I will never get an edge investing in these kinds of companies. It is a losing man’s game where the billionaire hedge fund managers dominate. An overcrowded market with too much competition. If you are actively investing, the goal is to beat everyone else in terms of performance. Building a closet index fund by owning every tech stock everyone else owns is a complete joke. Stop being a sheep and invest in what everyone else won’t touch. That is how you make real money.
One of the great things about investing in these obscure microcap companies is the pump and dump nature that comes along with these stocks. Yesterday, one of my largest holdings was pumped by a well known guru that sent the stock up over 10% in after hour trading. This was after a nice 7% upward move that day when the market was open.
The pump came from this tweet. Interestingly enough, last time this guy tweeted about this company was last year around the same time, and the stock went from $1 to $10 per share in a matter of days.
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