Reminiscences of a Full Time MicroCap Investor

I am very lucky to be able to make a living doing what I am truly passionate about.  This blog post isn’t about how great I am because there are plenty of microcap investors much smarter than me. Luckily for me, “smarts” will only get you so far. It’s not the smartest microcap investor that wins but the one that is going to work the hardest.

Mike Schellinger (@MikeDDKing) is one of the best and hardest working full time private microcap investors I know [his recipe]. He supports his wife and six kids. Six Kids! Get a TV Mike. At least I only have to support my wife and cat. [Update: I now have a daughter].

Full time private microcap investor = You don’t have another job or source of income other then investing in microcap stocks. You only manage your own money.

I think the biggest reason people don’t quite understand how someone can be a full time private microcap investor is because it’s so rare. Most successful investors end up starting a fund and managing other people’s money so they can scale and monetize their expertise. Staying a full time private investor is an enigma. My hope is we don’t go the way of the dodo bird and go extinct 🙂

I’ve found that successful microcap investors all invest a bit differently. They aren’t cookie cutter. This lends itself well to discussion and idea generation, which is why MicroCapClub was formed in the first place.  We are an odd and eclectic group just like the companies we invest in.

I find the blessing of being a full time microcap investor is also the curse.  Communicating with management teams, evaluating new stock ideas, and talking with other investors on a daily basis is a lot of fun, but it can also be a detriment if you don’t have a focused buying-selling strategy and discipline.

Here are a few VERY random thoughts and reminiscences on microcap investing and the profession of being a full time private microcap investor:

Travel light travel far

Being a full time microcap investor is tough because you have to sell stock every month to pay bills. Some years you will hit it out of the park and be up 200% and some years you will be down 50%.  For me, 2008-2009-2010 were great years. I’m a very concentrated investor, so all it takes is one position to do really well for it to be a good year, but the same thing happens in reverse. All it takes is for either nothing to work or having 1-2 positions implode for it to be a bad year. 2011 was awful for me, and in these times in particular when your positions are down selling stock to pay bills just exacerbates the problem. For me it’s important to keep my fixed costs as low as possible. This is why I live in Amish Country. No I’m not Amish.

“The market is fine, You are wrong”

At our last MCC meetup in Philadelphia, an investor told a great story with a great quote from his dad. He said that many years ago he had been complaining to his father about one of his positions and how the market didn’t understand this particular company because the market wasn’t valuing it correctly. After a couple years he had become even more frustrated that the market still wasn’t waking up to this company.  Finally his father looks at him and says, “The market is fine, you are wrong”.  It’s important to always look at your positions as if it were the first time you’ve looked at them.  Sometimes you are right in waiting, and sometimes you are just wrong.

No Bitching in MicroCap

People ask me all the time why I don’t just start my own fund.  Well, I can’t think of anything worse then having to answer to investors. Many high net-worth investors say they understand the inherent volatility in microcaps, but I know they don’t. In microcap +/- 10% monthly swings in performance is quite normal. I know if I was to manage a fund, the first down month when the first client calls questioning- bitching-whining-complaining about performance would be my last day managing their money because I would send it back to them. No crying in baseball. No bitching in microcap.

Stay Cool

If you are an experienced microcap investor you  most likely have a high risk tolerance and do well in volatile situations.  Staying cool in volatile situations has served me well over the years. When a stock goes down 50% in a day, stay cool. When a stock goes up 50% in a day, stay cool. It’s an opportunity.

“With a lot of companies it takes 3 years for their stock to go up 400% in 6 months”

At our last MCC meetup, one of the investors used the line above and I thought it really summed up a bunch of points. In most cases it will take much longer for a story to work then you think. And it’s in our DNA to give up right before it actually starts to work.  And when the stock starts to work it works quickly.  How many times have you sold a position and immediately that stock goes up? Too often for me to count.

Buying is Easy, Selling is Hard

Buying is always fun. I don’t know why, but it’s a combination of a mental rush of deploying capital and also the feeling of how smart you are going to look when the investment goes up 2-5x in the next 6 months.  Selling on the other hand is much harder. I think one of the biggest mistakes I made early on was selling my winners when I should have been selling my losers.

Boy, I am Smart, Now Time to Sell

I was on a vacation with my then soon to be wife a few years ago. One of the positions I was in was working big time. I started getting big headed about it, and must have said something asshole(ish). She called me a cocky prick. I immediately went to the computer and started selling.  When I start getting big headed about a winning position ie “Boy, am I smart”. I should be selling. This has served me well over the years.

After a big win, take time off

My biggest losers have always come after my biggest winners.  After a big win you are over confident, cocky, and a know it all. This mentality also causes an investor to deploy capital in irrational ways. I remember when I was in a position that went up 10x in 7 months. It felt good. It felt really good. I bought a Porsche, which I later sold because my wife made me. That was single Ian, now I’m married Ian.  Ok back to the story, so I was feeling really good and too quickly deployed capital into two companies that were a bit outside my realm of expertise. One ended up being a fraud, and I lost $600,000, and the other just ended up being a real loser that I shouldn’t have been in in the first place and lost another $500,000.  Take time off, enjoy your fruits of your labor, get your feet grounded again, and then get back to work.

Sometimes the most profitable thing to do is take a vacation

The constant evaluation of new ideas versus current positions has cost me a lot of money. I only invest my own money, so I have a finite amount of capital.  I’m only in a handful of positions, and I’ll probably be in them for 6 months – 3 years (depends how “early” I am).  Constantly looking at new ideas can be very counter productive. You find a new idea, but you have to sell a position to buy a new one, and of course as soon as you sell it that stock moves up. I’ve often thought it would be cheaper for me to go on vacation for a few months and let the investments breathe versus micro analyzing everything to death. In most cases the best thing to do is nothing. Take a vacation.

I want to average up, not average down

Some of my biggest winners I was constantly buying higher. Some of my biggest losers I have constantly averaged down.  Obviously there are those rogue cases where averaging down a lot have really worked, but I would say more then 70% of the cases it doesn’t.

You Own Too Much

When you think about a position everyday and dream about the position every night you own too much. We’ve all been there; it’s normal but very unhealthy.  You should probably still own it, but you should sell some. Sell down the position until you can sleep at night. It’s funny how qualitative and stupid this sounds, but it works. I remember owning 200,000 shares of a stock, and I was thinking about the stock everyday and bugging the management team all the time. I realized I just had to sell some of it, and I sold it down to a 125,000 share position and that was my sleep at night position.

I hope investors have found a bit of value from these tidbits. I may add to it in the months ahead.

If you liked this article, you will enjoy Adam Epstein’s article: 10 Lessons Learned from Interviewing Hundreds of MicroCap CEOs

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