Why Micro-Cap?

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You may enjoy being your own financial advisor and saving roughly two full percentage points per year.  If so, you may want to take the next step.  The next step involves owning securities directly.  This involves research.  You better have reasons for owning the shares of a company.  In other words, you must do research on the company.  If you do own shares of specific companies, this portion of your portfolio is actively managed.  No matter how much you enjoy this nor how good you get at this, this should never comprise a significant part of your portfolio.

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What does Micro-Cap mean?  Cap is short for capitalization.  Market capitalization measures the value of a company and is calculated by multiplying the number of shares outstanding by the price per share.  This is the value the collective wisdom of market participants place on each company.  The value changes as the share price changes.  Micro-Cap companies have the lowest values.  Often they are new companies.  A loose value definition of micro-cap is a market value below $100 million.

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Why Micro-Cap?  Consider it a learning experience with potential upside.  It is much easier to evaluate a micro-cap company than a large company.  The financial statements are less dense and easier to grasp.  The management discussion and analysis (MD&A) is significantly fewer pages compared to a large company.  Micro cap companies don't have multiple product and service revenue lines.  Both the financial statements and the MD&A are presented quarterly and are essential reading.  The company website is smaller and provides the company’s narrative of the story, also essential reading.  Company news is easier to conceptualize in relation to the company narrative.  In general, micro-cap stories are easier to understand and evaluate.  On the other hand, micro-cap companies have not yet proven the narrative can be translated into significant, long-lasting, annual net income. 

 

The trouble with Micro-Cap companies is that many go bankrupt.   So, research thoroughly and even with thorough research, many picks will disappoint.  Make sure you research at least 5 companies before investing in the first.  Investment narratives typically sound good and you must discern a feel for the actual truth.  This is as much art as science (numbers & metrics).  No one is lying to you (unless the company is fraudulent) but the owners and management really believe the story.  They have likely invested a ton of their own money in the company.  Often this clouds their view and the story they tell. 

 

Timing is extremely important for micro cap sized companies.  Shareyourworld.com is useful example.  You haven't heard of shareyourworld.com.  They were formed in 1997.  They did the exact same thing YouTube does.  The problem was they were 8 years too early.  Broadband technology wasn't prevalent and video technology wasn't sufficiently advanced.  The viewing experience was poor.  Shareyourworld.com shut down in 2001.  Fast forward to 2005 and YouTube was formed.  Broadband was prevalent and the technology had advanced.  Two years later they were bought by Google for over $1.5 billion.  The difference between the two companies was timing.  Many micro cap companies are founded on great ideas, but many fail simply because the timing is off.

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I research micro-cap companies because I enjoy it.  I’ll post some here to give a feel of what I do.  You don’t have to be an expert in anything to get started.  If you do it enough, you will be the expert.

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