– Investing in small-cap stocks requires the ability to avoid losers as well as find winners.
– Small-cap stocks carry specific risks such as unproven business models and inexperienced management teams.
– Research shows that the majority of stocks lose money, while a small percentage account for most returns.
– The recipe for finding a stock with a 100x return includes multiple growth, earnings/intrinsic value, and earnings growth and multiple expansions.
– Other important attributes to screen for include smaller size, differentiated products/services, a large addressable market, long-term-focused management, and underfollowed stocks.
– Holding onto winning stocks for as long as earnings are increasing can lead to significant returns.
– Avoiding bad investments is just as important as finding good ones in order to be successful in the market.
Investing in small-cap stocks can be a tricky endeavor. While it’s important to find winners, it’s equally important to avoid losers. Small-cap stocks come with specific risks such as unproven business models and inexperienced management teams. These firms often lack sufficient financial resources, which can lead to significant dilution and even total capital loss for investors. However, by focusing on a subset of companies that have the potential to perform well, investors can increase their chances of harvesting alpha.
Research has shown that the majority of stocks actually lose money, while only a small percentage account for most of the returns in the market. This highlights the importance of being selective in investment choices. So, is there a recipe for finding those stellar investments that can deliver a 100x return? The answer is yes, but it’s far from easy. The recipe includes multiple growth, earnings/intrinsic value, and earnings growth and multiple expansions.
In addition to these factors, there are other attributes that investors should screen for when considering small-cap stocks. Smaller companies tend to adapt more quickly to changing market conditions and often have faster growth rates. Companies with differentiated products and services are also worth prioritizing. A long runway and a large addressable market can also contribute to a company’s potential success. It’s important to look for a proven, long-term-focused management team whose incentives are aligned with investors. Finally, focusing on underfollowed firms and avoiding crowded trades can help investors obtain greater value for their investments.
Once investors have identified a subset of these companies, it’s advisable to hold onto the stocks for as long as earnings are increasing. Taking profits is a common practice in investing, but holding onto winners can lead to significant long-term returns. Howard Marks, CFA, noted in his memo that investors who held onto Apple stock from its split-adjusted cost of $0.37 in 2003 would have enjoyed a 500-fold return by 2023.
In conclusion, when it comes to investing, it’s important to avoid the bad apples while seeking out the winners. While investing in small-cap stocks comes with specific risks, by being selective and focusing on companies with growth potential, investors can increase their chances of achieving significant returns.
