By Marshall Sterman
The MicroCap market is the least understood and under-appreciated segment of the stock market in spite of the fact that it can be mined for outsized gains if one approaches it, not for short term trading profits, but as a small percentage of your long term more conventional and conservative investment portfolio. MicroCap investment strategy requires individual commitment, resolve, homework, and a set of guiding principles that one cannot deviate from. Think Peter Lynch and Warren Buffet, not Carl Ichan and Bill Ackman.
In following this prescription you need to adopt a 5 to 10 year outlook as opposed to instant gratification. You also need to think like a VC and private equity analyst in looking for the kind of entrepreneurship and leadership that can build, brick by brick, upon what came before. And don’t expect others to applaud; institutional investors and money managers will never spend the time and effort necessary to unearth the opportunities the MicroCap market is rife with; your reward will come when they will pile on long after you’ve accumulated your position.
MicroCap investing is more akin to art not science, so you need a palette, not a microscope; no spreadsheets and earnings forecasts, no market timing. Go back and look at many of the recently emerging winners and for the most part you will see that it took time for an entrepreneur and/or a management team to build what the markets eventually deem an overnight success. And I’m not advocating a formula, because there isn’t one. The risk factors would fill a book, but you should establish a toolbox, some guidelines, before putting your toe in the water; and I do mean one toe.
My suggestion is that you need to make several decisions and distinctions as you winnow out the possibilities. First you need to understand and appreciate what management envisions; what they are trying to build. Ask yourself: What markets are they addressing? Are they large and sustainable and does the company have the wherewithal to penetrate them in a meaningful way over time? Is there a competitive edge because of their innovation, technology, and patents, and do the margins allow for reinvestment without huge dilution to shareholders?
When you identify this, you have an uncut gem that is generally unknown and/or is greatly undervalued, giving you a chance to add more shares to build a meaningful position relative to your investable funds. Typical of these companies is that they quickly achieve cash flow that is immediately reinvested in what now is a formula for growth. Market share is enhanced and new capital will fuel future expansion. Do not focus on earnings; by the time they are predictable it is too late as they will have been extrapolated into price.
I advised you to build a tool box of information; make sure that Shelly Kraft and StockNewsNow.com is your first priority. Then the NY and London Times, WSJ, and as much CNBC Squawk Box as you can assimilate.
Editor's Note: Marshall S. Sterman, Board Memberships- BioChemics; Alterix, BioScriptives, IntelaTrak, Allied First Class Partners, Allied Programs. Host, “Way Off Wall Street”. Brandeis University, BA; Harvard Business School, MBA; Lt. JG., USN; Associate Member: National Investment Banking Association
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