My Investment Approach: Strengths and Weaknesses
Today, I want to reflect on some of my investment decisions since switching to mostly micro and small cap investing. I’ve made a 5-Point List.
I’ve been mostly focusing on micro and small cap investments for almost a year now. When I started, I knew this change will also require me to adjust my investing approach in many ways.
To be precise, I’ve made a quick 5-Point list. If you have any questions or additions, let me know in the comments.
Change Happens Quicker:
You might know the saying that stock prices move around a lot more than the fundamentals of a company. That is true for small caps just as for large caps.
However, the fundamentals of small caps change much quicker than those of large caps. Since the businesses are less complex and operations often rely on one business branch, it’s a lot more sensitive to changes.
Inaction and Patience:
Resulting from No.1, we have to talk about patience.
Patience is often considered one of the most important characteristics for successful investing. And it is. But when companies change quicker, you have to adapt quicker.
I’m very good at being patient and sit through bad media storms and all of that. The problem is that inaction in small caps can hurt a lot when you miss that the business actually changed.
Quick Announcement: I’ll create a community discord this weekend that all paid subscribers can join. We can talk about investment ideas, general market developments, etc. I’ll let you know when it’s online.
Also, Stock Pitch #10 is ready, but the company publishes earnings tonight, so I’ll wait for these and make adjustments if necessary. The article will be posted in the following days.
Buy and Hold:
Buy and hold is a great concept investing in companies like Apple, Microsoft, and so forth. But even as a long-term investor, I had to accept the fact that micro and small caps need to be traded at times.
Let me give you a recent example. My latest portfolio addition was Alarum. I bought it in the mid-twenties. A couple of weeks later it gained about 70%. I passed on investing in Alarum prior when it was at a price above $30. I did so because I wasn’t willing to pay that price.
But if I wasn’t willing to pay $30 for it, the smart thing would’ve been to take profits at over $40. But I didn’t since I was still in the mindset of letting winners run and buy and hold. Now, Alarum is in the low twenties again.
I’m confident long-term (if not I’d immediately tell you and sell), however, selling at $40 and getting back in at 19$ would’ve been very profitable.
And don’t get me wrong, this is not some hindsight wisdom. I had similar price ranges in my investment thesis, as you can see in my articles.
Up to Date:
This brings us to No.4. Being up to date. It so much more important now to be up to date and know what happens within the companies than back then investing in large caps.
Volatility brings Opportunity:
The high volatility of these stocks brings a lot of opportunity. As mentioned in the Alarum example, you can have both a long-term goal for an investment and benefit from short-term volatility.
I’ll try to get better at this and consider more trading in these positions.
Important: I would only trade stocks that I want to hold for the long-term but that show high volatility on that ride. I would never start trading random stocks.
That’s it for today! Have a great day, and see you in the next post!
Daniel