1) When it comes to investing, don’t be a chicken, be a hawk : Don’t be afraid to say no to 99.9% of investment opportunities. You only need to find one great company, before others, to change your life. Extraordinary returns follow extraordinary discipline. An investor’s goal should always be to make as few investment decisions as possible. Keep your hurdle rate high and embrace inaction.
As you fly above the investment world looking for opportunities, develop tools, strategies, even statements, that you can apply quickly to evaluate opportunities. Know what you are looking for so you can develop the vision to recognize an opportunity quicker.
2) Don’t bother finding the next multi-bagger if you are not going to develop the conviction to hold it: Stocks rarely perform in the time frames we predict, and it’s why the market only works for investors that have a long-term portfolio focus. Performance is never linear, up and to the right, year after year. You sometimes have to hold onto a position for a few years before it goes up 100% in 3 months.
If you’re invested in great businesses that continue to grow and earn more money, don’t let lulls in stock price and boredom scare you out of them.
Investors tend to over-analyze when stocks are going down (fear) and under-analyze when stocks are going up (greed). The hardest part of investing is holding through these times, embracing boredom and inactivity, and distancing human nature-emotion from investment decisions.
3) Learn to differentiate between business performance and stock performance: Sustainable multi-baggers have certain characteristics: Long-term revenue and earnings growth with little to no dilution. When you are holding onto a position ask yourself – Is this business growing and making more money per share than it did a year ago, two years ago?
Successful investors can differentiate business performance from stock performance and can take advantage of those investors who can’t.
4) Avoid piling into a position at one go: All my winners had one thing in common, I was always averaging up. Most of my losers had one thing in common, I was always averaging down.
My personal investment philosophy is to buy microcaps that I think can be 5-10x in a few years. It might sound insane, but I don’t buy stocks where the peak potential return is less than 100%. I’m look for and buy undervalued companies that have the potential to get very overvalued.
5) Successful investing isn’t about being right all the time; it’s more about the ability to identify when you are wrong quicker: When you find yourself constantly averaging down it’s normally a sign that your ego has taken over. You’ve convinced yourself you have to be right, but you forget that being broke and right is the same thing as being wrong. Your ego clouds your judgment and slows your thinking. Many investors have gone broke trying to prove the market wrong, and you certainly aren’t going to prove yourself right by throwing good money after bad.
6) The management makes the difference: The smaller the company, the more should be the focus on management and qualitative analysis. CEOs of small microcap companies tend to wear a bunch of hats, so their influence is much greater than larger companies. Founders are the difference makers.
Invest in management teams that focus on the long-term and let their execution do the talking: 90% of microcap management teams say too much and do too little. This rare breed is called “intelligent fanatics”. I want to invest in owner-operators that have an intense focus, integrity, energy, and intelligence.
In conclusion, keep this in mind:
- I like companies with no debt, or at least low debt. Small companies and debt just don’t go well together. Travel light, travel far.
- Cash flow, not reported earnings, is what determines long-term value. Undiscovered companies that can sustain 30-40+% growth rates from internally generated cash flows are hard to find.
- Look for owner-operators with intense Focus, Integrity, Energy, and Intelligence.
- For a small microcap company to be a market leader, it must dominate a small market. I want to own businesses that dominate a small market that is expanding. This normally pushes quality attributes down to the financials.
- Look for a clean capital structure. I look for low outstanding shares, all common shares, and low amount of warrants/options as a percentage of outstanding shares. You want to invest in a management that treats its shares like gold.
- I prefer no institutional ownership. When you find and invest in great businesses that bigger money doesn’t own, the stock has nowhere to go but up.
- Find repeatable, sustainable, profitable growth. My biggest risk as a microcap investor is dilution. I want to find companies that are self-funding their growth.
- Buy when the business is fundamentally undervalued to limit risk and to fully leverage multiple expansion. Your margin of safety is buying an undervalued business that can get overvalued.
- What counts in the long run is the increase in per share value, not overall growth or size.