The "Microcap Mentality"

Note: This is a very timely article given the severe pullback in the micro-cap and small-cap space. I personally do not think I have seen as many opportunities to invest in such promising micro-caps as I see now. We are now fully invested in companies that we feel have the most substantial opportunity for upside returns.


Having the right frame of mind- or "mentality"- when investing in microcaps is absolutely crucial to the success you will have with your investments. In fact, I would go as far as saying that having the right mentality- let's call it the "Microcap Mentality"- is the number one thing you can do that's within your control to put you in the best position possible for success. 

Let me explain...

I was a day/swing trader for many years before turning to microcaps several years ago. As a trader you care very little about the actual underlying company you are investing in but more about the technical setup of the stock, potential earning surprises, timing the market, a build in the RSI to indicate momentum in the stock, among many other factors. When I shifted my focus away from trading and into microcap investing, I quickly had to learn that I was actually investing in the business, a business that I needed to understand as if I were part of the Executive Team at the company. And let me tell you, it's not an easy thing to learn and apply, but it's one of those things that is an absolute requirement for success. 

When I learned this concept and was able to successfully apply it, my returns increased substantially. Instead of selling a microcap company because of some wild move down that would cause me to panic, I would add to my position with confidence because I knew almost everything public there was to know about the company and I knew the story was intact. 

I will try to illustrate this point through an example. There was a day earlier this week where our positions were down between 10% and 25% each. Kelso (KIQ), for example, traded down in the $.80s, which was totally crazy and clearly not a rational sell-off. So I picked up more shares and today the stock closed at $1.18. Why? Because our investment thesis did not between the market open and the time I purchased shares. Having that kind of approach, as if I own part of the company, is very helpful when finding the courage to buy shares when it appears like you are catching a falling knife. 

Similar example with Ackroo (AKR.V). It sold off to around $.175 over the past few weeks. Matthew and I knew this was a heck of an opportunity to add some shares, which we did. Just this week the company reported Q3 2015 numbers which showed significant progress in the business. The story is intact and we were able to pick up some cheap shares around $.175. I welcome these opportunities!

Bottom line: Use volatility to your advantage. Take advantage of what appear to be irrational sell-offs in companies you own...but only if your conviction level is still the same and your investment thesis hasn't changed. Otherwise, you are playing a game of "tug-of-war" with yourself.