Other Stuff
We are always trying to find investing opportunities that have risk and reward skewed in our favour. Many believe that to get high rewards in investing you need to take on high risk. And for a long time, I believed this to be true. However, as I gained experience, mostly through trial and error, I came to find that high rewards do not have to come by taking on increased risk. In fact, it’s the opposite. Lowering your risk can actually increase your reward if you know how to do it and where to look.
I believe the best insurance against loss in the stock market is to buy when things are cheap. What I mean by buying cheap is to buy with a defined margin of safety. That might mean buying below cash value, it might mean at a lower PE value than its peers, it might mean a low PEG ratio or maybe all of the above. It might also mean when it is undiscovered.
Many investors believe microcaps are riskier than large caps. As a whole, they are. So many microcaps are nothing more than speculative investments with unproven management, unproven business plans burning lots of cash. But within the group are some great businesses that will, in time, turn into large caps. Remember every large cap was once a small or microcap.
Many times, what you pay for an investment is more important than what you buy. You can lose a lot of money by buying an overpriced large cap. According to Howard Marks “It's not what you buy, it's what you pay. And success in investing doesn't come from buying good things, but from buying things well. And if you don't know the difference, you're in the wrong business.”
Buying microcaps well, before the crowds find them, when they are too small for analysts and institutions is one way to give yourself an additional margin of safety. It can decrease your risk while increasing the potential upside of when everyone else finds out about it and clamors to buy the stock.
You can buy a great performing large cap at an inflated price and still lose money. If everyone knows about the company, it’s hard to gain that margin of safety. But those little, obscure companies that are quietly growing their businesses and away from the eyes of the crowds can give you that extra edge and price protection but also give you that explosive potential upside when the crowds do find it.
If you can learn to buy microcaps “well” you can dramatically skew the risk/reward in your favor.
SCD Investors Conference
The list of companies confirmed to present at our October 11 conference continues to increase. Here’s the list so far:
Atlas Engineered Products – AEP..V
BeWhere Holdings - BEW.V
Enterprise Group - E.T
Sabio Holdings - SBIO.V
Char Technologies - YES.V
Kits Eyecare - KITS.T
Imaflex - IFX.V
McCoy Global - MCB.T
Zedcor - ZDC.V
Canadabis Capital - CANB.V
Grey Wolf Animal Health - WOLF.V
Data Communications Management - DCM.T
Firan Technology Group - FTG.T
Ceapro CZO.V
Fab-Form Industries FBF.V
iFabric - IFA.T
This week’s reading: King of Capital, Inside the Trillion Dollar Private Equity Industry That Owns Everything.
To your wealth,
Paul and Trevor
