A few weeks back I was sitting around the campfire with my wife and children and we were playing a pattern matching game. Later that evening I was watching and helping my three year old son with a puzzle which is another pattern matching activity. After the activities of that day I was pondering trading and investing and recalled that success is really a matter of good pattern matching. A pattern matching strategy boiled down to a well defined methodology is what separates successful traders and investors from the proverbial monkey throwing darts. Typically, the pattern matching revolves around things like financial information/trends, management comments, industry trends, and investor sentiment.
There are many patterns that can be matched to trade and invest successfully. Classically, there have been two types of investing called value investing and growth investing. Many value investors read the writings of Ben Graham, the father of value investing, to learn the techniques he described. There is even a blended version of value investing and growth investing called “Growth at a Reasonable Price” or GARP. Peter Lynch shared his investment checklist which is really a part of his pattern matching methodology.
While I’m not Ben Graham or Peter Lynch, I have found a successful pattern matching methodology that I have used for many years. I detailed this in two articles that I wrote for selecting microcap stocks including My Secret Recipe: The Index Card and My Secret Recipe: Shopping and a Taste Test. In fact, in the second article I detailed BioSyent (RX.V / BIOYF) as a company that matched my pattern. Since that article was written a little more than a year ago, BioSyent has risen 155%. I’m pointing out the success of that pick not because I want to brag, but rather to demonstrate that a well defined pattern matching methodology is the key to success.
I’m not the only contributor at MicroCapClub that has detailed a pattern matching scheme that has helped them to be successful. Mark Vonderwell has detailed his strategy of finding disposition situations in his multiple articles such as MicroCap Getting Smaller? Get Excited!, Disposition Case Study: Broadway and Seymour, and Disposition Case Study: Clearfield Inc.. Ian Cassel discussed his very easy (easy to comprehend, not to execute) investing strategy in the article entitled Global Market Trends and the Microcap Benefactors.
While there are many successful methodologies, I think the key to success is to find a proven methodology which is comfortable for you and really learn the techniques. In order to do this successfully, you are going to need some minimal ability to read financial statements plus a dose of discipline to spend the time to learn the methodology and follow it closely. While multiple methodologies can be deployed by a single person, I think it is best to master one methodology before exploring another. Like many fields, trading and investing requires continual learning in order to keep up with the evolution of markets and to enhance your skills. I think it is equally important to both learn what works and to learn what doesn’t work. I find that I learn much by following what other investors and traders do and seeing what works and what doesn’t.
If you are an experienced microcap investor, I invite you to join MicroCapClub where we use a variety of different pattern matching techniques to find the best microcap stocks.
Disclosure: Mike Schellinger (aka MikeDDKing) is long shares of BioSyent.
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