Why Micro-Cap?

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.

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.

Why Micro-Cap?  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 than with a large company.  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.   There is usually only one stream of revenue.  Compare that to a large bank.  They have multiple product and service lines.  At any given time, some lines are doing well, others aren’t.  Micro-cap stories are easier to understand and evaluate.  On the other hand, micro-cap companies have not yet proven the story 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 stories typically sound good and you must discern a feel for the actual truth.  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.

A good place to start screening potential investments is on SEDI.  You can scroll down a list of transactions of company insiders.  Which companies have insiders buying?  This could be a sign that insiders feel positive of the company’s prospects.  This doesn’t replace research.  Follow this by thoroughly reading their website.  What do they do?  What problem do they solve?  What is the size of the potential market.  Then, on to the financial statements and, more importantly, the MD&A.  The story is more important than the numbers for most micro-cap companies; especially the younger ones.  Expect the financials to show a loss.  They are spending now to reap later.

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.

Kraken Robotics Inc. research  Oct 2020

Nevada Copper research  Nov 2020

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