So, Why Microcaps?
Ian Cassell, founder of the MicroCapClub, summarized it best by writing the following in an article he titled "It's Time to Change Your Perception of Microcaps":
The term “microcap” has a negative perception or label perpetuated by most financial pundits, regulators, and even investors. Most look at the 11,000+ microcaps in North America and judge them as being sleazy, slimy, and insignificant. This label couldn’t be further from the truth. Many of the best investors ever, including Warren Buffett and Peter Lynch started their careers investing in microcaps. Some of the best performing companies ever, including Berkshire Hathaway, Wal-Mart, Apple, started as small microcap companies. Today, North American microcap companies employ over 2.8 million jobs. More jobs than Google, IBM, Home Depot, Berkshire Hathaway, AT&T, Pfizer, Cisco, Microsoft, Boeing, General Electric, and GM combined. All Great Companies Started As Small Companies, and it’s time people changed their perception of this unloved equity class.
Let's explore this for a second: All great companies were once small, tiny companies. It's just a fact-- they were. And while hindsight is always 20/20, there are tiny, microcap companies trading publicly right now, right in front of us, that will be the next billion dollar companies of future generations.
If you want to put yourself in the best position to generate significant long-term investment gains, you have to work hard and find microcaps with a great team guiding the ship with a phenomenal vision. You have to embrace illiquidity and volatility and be patient when buying your positions in these companies because it can take some time to do. And you have to be patient, very, very patient as the company's vision becomes a reality. Buy when illiquid and sell when institutions want to buy your shares at much higher prices...this, my friends, is how to position yourself for significant wealth creation by investing in microcap companies.
It's hard, it takes incredible amounts of due diligence, and one hell of a lot of patience. But you become smarter as an investor and a person throughout the process of microcap investing. And you may just create a small fortune for yourself throughout the process as well. At least by investing in microcaps you are putting yourself at a SIGNIFICANT ADVANTAGE to do so-- something you can't say by investing in any other asset class.
Ever wonder how Warren Buffett got his start? I’m sure you might think he invested in safe, blue chip companies his whole life. That couldn’t be any further from the truth. Buffett got his start by investing in small, little known companies with a lot of value that the market just couldn’t see. He understood there was a massive advantage by being a smaller investor, managing smaller sums of money. What was it? He had the ability to invest in very small companies, often stuck in confusing situations caused by a lack of readily available information. More importantly, he understood that by only managing small sums of money, he was able to invest in names that some of the brightest minds on Wall Street couldn’t, mainly because they actually managed too much money.
Think about sports for a second. If you’re on the Junior Varsity team, you certainly wouldn’t want to be playing against Varsity caliber players all the time. When you invest in large, blue chip stocks, that’s exactly what you’re doing. Competing against some of the best and brightest minds on Wall Street. You want to play against the Freshman team, where you’re odds of winning are much higher.
This is your advantage as a microcap investor: The ability to invest in little followed companies, with massive potential, that the best and brightest on Wall Street can’t even touch.
Think about it...Warren Buffett manages billions of dollars. If he bought an entire microcap worth $10 million who’s value magically increases 10x in value over the next year (that’s a huge return), that won’t even dent the overall performance of his multi-billion dollar portfolio. Yet the stock increased 10x! I’m sure he dreams of being able to invest in those small companies again. Imagine being able to own a chunk of a very small stock that increased 10x in your portfolio. It would have a massive impact.
And you can. This is the advantage of microcap investing.