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If you find a well-run cash generative micro/smallcap, share this article with the management team. Subject: Just Do This!
I often am asked how I find the microcap stocks that I invest in and trade. A few times I’ve answered that question vaguely like when your grandmother described the ingredients of the family favorite recipe as a dash of this and a dash of that. Everybody loves that
I often am asked how I find the microcap stocks that I invest in and trade. A few times I’ve answered that question vaguely like when your grandmother described the ingredients of the family favorite recipe as a dash of this and a dash of that. Everybody loves that favorite food but nobody knows how to make it other than grandmother because she has never written down the recipe. Well, I finally got out the index card and started writing.
Before I go into what is on that index card, I’m going to talk briefly about the taste of my secret recipe because you might be questioning how good the food is especially if you have never tasted it. Over the years I’ve refined the process that I use and am able to select winners roughly 73% of the time based upon positions closed between 1/1/2010 and 9/27/2012 in my personal accounts. According to one article, stock traders tend to “win” around 55-60% of the time so my track record is significantly above average. Additionally, my aggregate profits have significantly exceeded my losses. My success has enabled me to trade and invest full-time for a living in the microcap space for six years.
While I have found a recipe that gives me a high percentage of winners, I’ll also be quick to point out that there are many ways to make money and my way isn’t the only way just as there are many fabulous recipes for food. Furthermore, multiple methodologies may be deployed by an individual trader and investor to make a portfolio just like several recipes are used to make a tasty meal. While I do use different methods I’ll focus on my favorite recipe that I use for the vast majority of my investments and trades. While this article attempts to reduce my recipe to a formula it is important to understand that while there is a large part of my methodology that I can quantify, there also is a fair amount of what I do that falls more in the category of art and can’t be quantified. In some cases there is a pinch of salt and other cases there isn’t and I can’t describe all those cases.
My recipe essentially is to find rapidly growing profitable microcaps that are at very cheap prices relative to present or future earnings. I’m looking to find the microcap equivalent of something like LULU only at insanely low valuations. I will go into more detail below.
On the front side of the index card I will write the ingredients for the meat of my favorite stew. For my recipe to work you have to have all of these ingredient and there is no substitution. Hence, these are essential ingredients. The essential ingredients are:
Stew has to have more in it than just meat. So, on the back side of that index card I’ll describe the possible ingredients that gives the stew it’s fine taste. I’m calling them possible ingredients because you can make the stew differently as not all ingredients are required. You just need enough of them to make the food taste exquisite. Here are the possible secondary ingredients:
Beyond the tangible ingredients there are also some other things that I consider but these areas are more intangible and not easily quantifiable. Management quality and experience, the company’s prior track record and history, chances of fraud, and earnings quality are items that I consider. Again, a portion of this falls more into art than the science of trading and investing.
That ends the first installment. In the second installment I’ll talk a bit about how I go shopping and then we will enter the kitchen and cook a sample.
My Secret Recipe Series:
Part 2: Shopping and a Taste Test
Part 3: Inspecting the Ingredients
Part 4: The Bargain Rack
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If you find a well-run cash generative micro/smallcap, share this article with the management team. Subject: Just Do This!
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