> ## Content Index > Fetch the complete content index at: https://microcapclub.com/llms.txt > Use this file to discover other available public pages before exploring further. # From Speculation to Investment - URL: https://microcapclub.com/from-speculation-to-investment/ - Published: 2026-10-07T09:43:15.000Z - Updated: 2026-10-07T09:43:15.000Z - Author: Ian Cassel - Tags: Education *You can listen to this article as a podcast on* [*Spotify*](https://open.spotify.com/episode/5kWJECWFjiQAkPQZxB2pTB?si=OJLYIpYqRM6laWj43CFY8Q&ref=microcapclub.com)*,* [*Apple*](https://podcasts.apple.com/us/podcast/microcapclub/id1765974269?i=1000793629386&ref=microcapclub.com)*, and* [*YouTube*](https://youtu.be/7S8U%5F3GOTWU?si=S75RgyVfg7ESAt%5FU&ref=microcapclub.com)*.* If you planted one hundred Douglas-fir trees with 12-foot spacing in a cleared area, what would happen in 80 years? Would you get a hundred trees that are the same size? No. In 80 years, a couple dozen would be huge (120 ft tall), a third would be dead, and the rest would be half the size of the large ones. The interesting thing is in the first 15 years all the trees would look relatively the same. There would be plenty of sun to go around because they aren’t growing into each other. But even in the first 15 years, some of the trees would gain a slight advantage for a variety of reasons. Perhaps some of the trees had a few less rocks in the soil. Perhaps a few trees got infected with a pathogen or fungi that impacted growth. Maybe a rabbit ate the top off a few trees in year 4\. Any number of random events caused a slight 3% advantage/disadvantage which helps shape the entire forest 80 years later. At around the 15-year mark, the slightly larger trees gain an advantage as the trees start growing into each other. The larger tree’s branches and leaves creep overtop of the smaller tree, taking more light, and it allows the larger trees to grow faster, while suppressing the growth of the smaller trees. This is called size-asymmetric competition. You compound this advantage over another 65 years, and the dominant trees are twice as tall. But it’s much more lopsided than it looks. It isn’t just about height. As trees grow taller, they get thicker. A 120-foot Douglas fir might be 48 inches thick. The smaller 60-foot tree next to it is only 18 inches thick. If you do the math the taller tree is carrying 25x as much wood even though it’s only twice as tall. The amount of growth in the taller tree is exponential in all directions even though a person focuses only on height. A portfolio can grow the same way. **Winners Create Concentration** If you bought 20 stocks and equal weighted them (5% each), the portfolio would concentrate itself into its winners. And it wouldn’t take 80 years like trees. In 1-2 years: - 4-6 stocks would dominate the portfolio (50% or more of the portfolio combined) - 4-6 stocks would be dead (sub 10% combined). - 8-12 stocks would be medium sized making up the rest of the portfolio. **Growing Thicker, Not Just Taller** The dominant stocks are like larger trees. The management teams executed and perhaps with some luck compounded a slight advantage into a more sustainable one. As the stocks rose higher so did their revenue. But it wasn’t just revenue. Microcap stocks are small businesses, and small businesses are fragile like young trees. Small microcaps are filled with concentration risk. Key person risk, customer concentration, product concentration, geographic concentration, all combined with a constrained balance sheet. The spectrum of outcomes (mainly bad outcomes) is wider in small businesses. This makes small businesses/microcaps on average more fragile and of lower quality than larger businesses. As a small business grows it expands in all directions. It becomes more diversified across many of the areas where it was once concentrated. More employees, more customers, more products, more processes, more depth. They get thicker, just like a tree. The balance sheet also expands as the company gets larger which makes the business more attractive to larger customers. This becomes an advantage over smaller competition that allows the slightly larger business to continue to grow quickly. **Quality Deserves a Higher Multiple** If you compare two microcap companies in the same industry selling relatively similar products or services with similar growth rates. Let’s say the only real difference is revenue. One business produces $20 million in revenue while the other produces $50 million. Most microcap investors would give them the same valuation multiple. In fact, a pet peeve of mine is when a company presentation includes a peer comparison table filled with companies that are 10-100-1000x the size of the small microcap company. It is meant to show the small microcap company is undervalued compared to its peers. Guess what? Those larger companies aren't peers. It's like comparing a high school football team to an NFL team. The larger peers on average are worth more, not just because they produce more revenue but because they are higher quality, less fragile businesses. They are deserving of a valuation multiple 2-3x that of the smaller company. This might not get represented cleanly in public market valuations, but it certainly does in M&A transactions. **From Speculation to Investment** The best microcap investments grow like the dominant trees. Not just taller, but thicker. Revenue and earnings increase, but so do the customer base, management depth, and financial strength supporting them. This is what makes holding the right winners so powerful. As the stock rises and becomes a more concentrated position in your portfolio, the business itself can become less concentrated and less fragile. The company you own may deserve a higher valuation not simply because it is larger, but because it is better. That doesn’t make it worth any price. But it does mean you should evaluate the business it has become, not anchor to the stock price you once paid or the business it once was. The reward for holding a winner isn’t just a higher share price. It can be continued ownership of a business that is outgrowing the weaknesses that once made it speculative. That is how a speculation turns into an investment. ![](https://microcapclub.com/content/images/2026/07/61ROriaWzmL._SL1500_.jpg) #### Stock Picker Pre-Order my new book, and get the first three chapters! 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