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Don't Worry About Illiquidity, Worry About Being Right

Liquidity always increases with price.

I’m a full time microcap investor and I make my living exclusively from capital gains in microcap companies.  I’m not any smarter than anyone reading this blog. My only advantage has been my passion for microcaps started at a young age. This has been beneficial since it has allowed me to lose lots of money early in life. I continue to lose money in microcaps from time to time, but my win percentage has increased through the years. My goal with investing has always been finding great growth companies before the masses. Microcap investing is hard so it’s important to stack the deck in your favor.

I get asked quite often, What do you look for in a microcap company?

I’m looking for companies in an emerging trend with a great management team, share structure, with a unique product or service where there are few if any competitors and public comps. When the underlying emerging trend has emerged and the public and institutions are looking for an investment vehicle, I want this one company to be it. This is called scarcity and it’s one of the most powerful forces in any stock move where valuations are thrown out the window. Oh yeah, and I also want to find them very small, preferably sub $20 million market cap and the more illiquid the better. I want high insider ownership and no institutional ownership. I want companies that are profitable or have the cash runway to get to profitability.

Other than that I’m pretty open-minded.

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Scarcity can create some of the biggest gains in the market. Quepasa (QPSA), now MeetMe (MEET), in 2010 was the only public social network, and this scarcity value drove shares from $3 to $14 in less than a year. Volume also increased tremendously. When I started buying it volume was 10,000 shares per day, 9 months later it was 1 million shares per day. There were no alternatives and institutions had to own it and they didn’t care what they paid. MeetMe quickly dropped when alternatives in the social networking space came to market. What you want is scarcity as well as fundamentals. This is the dynamic I’m going after. It is rare and hard to find but they are out there. You combine this with a company that doesn’t need to raise money and it creates the perfect storm, as investors need to buy the stock in the open market.

Investing takes foresight, so you need to find these companies early, before the institutions…

There are 4,396 public companies on US Exchanges with market caps less than $50 million. The average dollar volume in these small microcaps (aka nanocaps) is less than $15,000 per day.  Most investors shriek like a vampire to a cross at the very thought of such illiquidity. But this is my playground.

Illiquidity is a beautiful thing. The more illiquid the stock the less known and cheaper the company normally is. I love it when it takes a month or more to buy a full position. My position sizing is unorthodox to most but I’m very comfortable holding a week to several months’ worth of volume.

Illiquidity is never a reason to not invest in a company. Why? If your investment thesis plays out and management executes liquidity will increase significantly.

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For example, 18 months ago BioSyent (RX.V) was a $0.60 stock trading $5,000 worth of stock a day. Management has executed very well and now it’s a $5 stock trading $250,000 worth of stock a day. A little over a year ago Plug Power (PLUG) was trading $50,000-$100,000 worth of stock a day, and just last week it was trading $1 billion of stock per day. So what this illustrates is as a management team executes and the market awakens to the story the stock rises and so does liquidity.

Small Retail -> Large Retail -> Small Institution -> Large Institution

(Dumb Money) ——————————————–(Smart Money)

When a company with a good share structure executes and volume goes from 10,000 shares a day to 100,000+ shares per day it represents not only increased liquidity but also a maturation of the shareholder base. Normally small retail investors find them first, what most would characterize as the “dumb money”.  Then larger retail buys, small institution and large institution. This maturation can be seen when you analyze a group of $20m market cap companies’ versus $100m market cap companies. The former have very little if any institutional ownership while the latter are usually 20%+ owned by institutions. Each wave of buyer has a greater appetite for shares and each one thinks they are smarter then the person they are buying from.  The small retail investor is always perceived as dumb even though they found the stock long before the institutions did.

The key is finding them and buying them early like small retail and selling them when the institutions buy them.  Be the dumb money and sell to the smart money.  You want to find them early when they are unknown and illiquid. I’ve made my living on finding them early and then selling to the smart money.  You want to find them at $10-20 million market caps and sell them at $100m+ valuation.

When an investment thesis plays out and the management team executes, liquidity often increases 10-100x.  So when you are searching for the next great microcap, don’t worry about illiquidity, worry about being right. 

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MicroCapClub is an exclusive forum for experienced microcap investors focused on microcap companies (sub $500m market cap) trading on United States, Canadian, European, and Australian markets. MicroCapClub was created to be a platform for experienced microcap investors to share and discuss stock ideas. Since 2011, our members have profiled 1000+ microcap companies. Investors can join our community by applying to become a member or subscribing to gain instant view only access. MicroCapClub’s mission is to foster the highest quality microcap investor Community, produce Educational content for investors, and promote better Leadership in the microcap arena. For more information, visit and

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