Investing in Small/Micro Cap Stocks

[donfairplay]

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I think Kimchi is right. I almost always recommend index funds because they protect you from making big mistakes. But index funds aren't probably the best options for microcaps. You might look for a small mutual fund with a strong record in small/microcaps (i.e. it beats the small cap indexes over the last 3 years or more), and get in before it gets too large to be successful anymore. I think a company called Bridgeway (?) has some funds with great track records in this space.

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I'm an investor in Bridgeway's Ultra Small Company Market Fund. The expense ratio is very low (.65%). I've done about average with it, about +11% over the year, but that's mainly because I bought it near its top. It tracks about the same with the CRSP 10 index. Its more of a quant/model based microcap fund than a stock picking fund.

I think the real value is reading John Montgomery's fund reports. He's very upfront about mistakes he's made along with his successes. There's even a section for each fund's top 10 biggest percentage losers entitled "What didn't work".

I've been *occasionally* investing in some of the individual stocks that he picks. However, you need to be very careful if you do that. I used to work for a subprime auto lender that was a big holding of Bridgeway's. The stock dropped real fast after a profit warning, Bridgeway sold every last share after the stock dropped 40%, then the stock dropped even more (around a 65% loss in a period of 6 months). Unfortunately, I'm unsure of when Bridgeway bought into the subprime auto lender, so the 40% loss may have been a long-term holding with steady gains.