Still a decent number of profitable microcaps hitting new highs and more capital coming down market in the form of a bought deal financing. This market still has plenty of stamina.

Other Stuff

We are in the thick of year end reporting season. The big companies are moving the market both up and down based on whether they’ve missed or beat analyst’ forecasts. Some are moving markets based on their outlooks. Overall market sentiment can be determined by a very small number of big stocks, after all so much passive investing results are determined by a small number of very large companies.

Equity market volatility lately has been a result of a few big companies reporting as well as the general overall macro narrative around inflation and interest rates. While these thing can and do have an impact on smaller companies in general, many times they have very little if any impact due to the innovative nature of many of these small companies. A small company that has discovered a more efficient way of doing something is likely to get more market share of their industry regardless if their industry is slowing down.

All to say that too much emphasis on the macro may cloud your ability to see the micro. Great companies can thrive in good or bad markets and good or bad economies. It’s why we always need to be on the lookout for the next great little company.

All big companies started as small companies. Many of the names that are so familiar today, whether it be Google (Alphabet), Facebook (Meta) and Amazon all started off as small companies. They all had growing pains along the way. Many of these companies faced serious growing pains while they were still private, far away from the eyes and emotions of smaller retail investors. We only know them as well financed, large and respected companies followed by dozens of analysts and regularly mentioned on business television.

But the next set of well-known blue chip companies are likely going through growing pains, scrambling for growth capital and doing so in relative obscurity. Some of these companies are still private but many are small public companies suffering the emotions of emotional investors that may react to every little bump in the road.

Last year I read a very impactful book by Ben Horowitz called “The Hard Thing About Hard Things”. Almost every innovative company seems to go through chaotic events. I call them “come to Jesus” moments. They are those times when founders/management sit in a room asking themselves if things will ever get better, if they will survive the current crisis and why oh why did I not listen to my parents and get a normal job like everyone else.

Good management teams of innovative little companies are rarely born that way, they are forged in the fire of uncertainty and chaos. Most of the profitable and growing microcaps we look at will have the odd stumble on their way higher. Earnings may temporarily stall, companies may have to fight patent infringement lawsuits, some will have to invest for future growth at the expense of short term profits, some new products will be duds, or a host of other things that cause temporary setbacks or cloud the immediate future. It’s our job as investors to try and determine which the short term stumbles are, where the company can dust itself off and get back to business, and which are the stumbles companies can’t recover from.

It’s those temporary stumbles that sometimes give us the best buying opportunities when other investors have given up. Business is hard, and all companies tend to stumble, but great companies find a way to fight through and persevere and sometimes even thrive in the chaos, and great investors know the difference and take advantage of these opportunities.       

To your wealth,

Paul and Trevor