I’ve been in the money making game for years. There is stuff that works and stuff that doesn’t. Multiple ways to make a fortune and multiple ways to blow up your account. You can win in this game investing in bonds and also win at this game using an options strategy. No one way is right. Find your niche and become an expert at it. That is how you win.
My niche is investing in the smallest companies around. Publicly traded companies with tiny market caps. I love companies no one else is looking at. Gone and forgotten. Untouchable by Wall Street giants. So illiquid that you have to be “poor” to invest in them. Microcaps. My bread and butter.
If you are managing under $10 million you should not be actively investing in the largest companies around. Do you really think you can compete with Bill Ackman, Warren Buffett or Chamath Palihapitiya? Managing a small sum of money gives you a huge competitive advantage. You can invest where the top investors cannot. You can make a meaningful position in the smallest, most illiquid and undervalued stocks around without moving the market. As Warren Buffett once stated:
“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.”
I love microcaps and the opportunity they offer individual investors that are managing a small pile of money. Given the liquidity constraints most microcap stocks have, institutional investors get priced out of them — YOU DON’T COMPETE WITH PROFESSIONAL INVESTORS. Your competition is other retail investors. I worked at a long/short hedge fund in New York City for ten years and found very few firms that focused on microcaps. You are your own competition.
Most of these tiny companies trade under $1 million in volume per day. If you are trying to allocate $10 million to make a meaningful position, you would have to buy the majority stake in one of these small companies — which could take months, even years. And even if you do get a $10 million position in a company valued at only $50 million, have fun trying to get out of that stock when your original investment thesis blows up on you.
If you are managing $1 million, taking a $100,000 position (10%) in an illiquid microcap becomes much easier. You can get in with ease and exit whenever you want. Being “poor” becomes incredibly advantageous as a microcap investor.
In addition to the liquidity constraints, if you utilize rigorous fundamental analysis, researching and investing in these tiny companies makes your job a little easier.
Most of these small and illiquid companies only have one business segment — and that segment typically isn’t broken down into three different subsectors like you would find with a large-cap company. In fact, these small companies usually have easier to understand business models. And if you really are unsure about a specific driver, you can always call up the management team.
From my experience, getting on the phone with a CEO of a small company takes as much effort as sending a quick email or blasting out a cold call. They will usually speak with you. Now try and get Elon Musk or Jeff Bezos on the phone with you to help you with a question on their business. Almost as unlikely as winning the lottery.
Finally, all companies start as small companies. Walmart, Amazon, Microsoft, etc. They were all microcap companies at some point in their business life. It is easier said than done, but if you want to find the next Amazon, you need to know where to search. Find great companies before institutional investors find them and you are set for life. Imagine investing in Amazon when it was just a $50 million dollar enterprise. Could you imagine that?
Now if I haven’t convinced you why microcaps are the way to go as an individual investor consider this chart.
Small companies have historically outperformed large companies. It is the asset class that delivers alpha. High returns on alpha at that. If you want to make a lot of money in the market, investing in small companies structurally gives you an edge.
Microcap Stock Picking Subscription
Have you considered subscribing to our microcap stock picking service along with 200 other investors? Each month we issue in-depth research reports on 1-2 top ideas that we find compelling. So far we have issued three in-depth research reports and plan to drop the fourth one mid-April. For only ten bucks per month, you will get institutional quality research on our favorite microcap stocks.
Here is a quick sample of what we are offering (taken from our third high quality stock idea that we think could be a double in the next 12-18 months).
“Company X” owns three high quality retail concepts that sell clothing to 35-45 year range “affluent” and “professional” women with incomes $150k plus. This demographic has been dying to leave the home and shop for new clothes that are not associated with the gloom of COVID. Pent-up demand is real!
“Company X” has a rock solid balance sheet with $109 million in cash and only $149 million in debt and an additional $58 million in income taxes receivable which should convert to cash following Q1. There are no near-term liquidity issues allowing investors to sleep well at night.
One of “Company X’s” brands has exploded during COVID. Ecommerce sales are up 72% y/y and not slowing down. We expect these sales trends to continue as this brand hits the right demographic with little competition (more on this below) and continues to take market share from a multi-billion dollar competitor.
The two other brands have struggled during COVID but the worst is behind them. We expect in-store sales to rebound fast during the back-half of 2021 as the vaccine is distributed and American’s return to their everyday life.
A massive amount of costs have been removed from the business PERMANENTLY! As sales recover cash will fall to the bottom line.
There is optionality. “Company X” owns over $75 million in unlevered real estate and could sell-off the two underperforming brands to private equity should results not rebound.
A former activist in the “Company X” has started to buy the stock again. I suspect this activist is ready to take a second bite of this apple.
We believe there is over 100% upside in “Company X” in the next 12-18 months as the economy reopens.
Access this research report for only $10 dollars per month and join our growing community of curious microcap investors. Don’t hesitate to reach out if you have any questions.
P.S. I am in Miami for the month of April. If anyone wants to grab a drink feel free to reach out.