Investing in Small/Micro Cap Stocks

[yellowbastard]

One of Bridgeway's funds I've looked at BRSIX has done 20% for 5 years but how long can it maintain this performance? The fund's NAV is at about $1B and the managers have already started to look to companies with market caps over $1B.

I would also note that BRSIX is extremely diversified (the fund assets are invested in thousands of common stocks of various companies) which makes think that simply buying micro-cap index might achieve similar returns.

I've recently been researching Rydex funds that track indices created by Standard and Poor’s that pick stocks based on fundamental factors such as P/E, P/B, ect... as opposed to just market capitalization. The indices are new, but if the methodology is backtracked 5 years the returns are higher than that of the market.

I agree that a vast majority of investors don't know what they are doing and should put money into extremely diversified broad market index funds but it seems like there should be something extra the "quasi-active" investor can do besides just buying VTSMX and getting 9% for the next 35 years. Even if it's only a point or two of out performance it will add up overtime.

[alebron]

DC,

How often, in analyzing a potential investment, do you consciously think of what Sklansky calls his Fundamental Theorem of Investment? I.e. you consider company X undervalued by 50%. Do you attempt to figure out why the market values it the way it does?

[DesertCat]

[ QUOTE ]
DC,

How often, in analyzing a potential investment, do you consciously think of what Sklansky calls his Fundamental Theorem of Investment? I.e. you consider company X undervalued by 50%. Do you attempt to figure out why the market values it the way it does?

[/ QUOTE ]

Not usually. There are many components of value and its impossible to guess what a bunch of random strangers think. DS thinks Taser was undervalued because legal risks, when some clearly felt it was overvalued due to poor financial performance and untrustworthy mgmt. In many of my picks a lower stock price and market cap can force some institutional investors to sell because they cant own sub $5 or $1 stocks.

[missmisery]

I invest almost exclusively in small-cap stocks because I feel this is where I have the biggest edge. My large holdings are companies that are extremely undervalued according to my analysis (I spend a lot of time doing so). I also like to take some small positions on more speculative companies.

I specialized myself in the mining sector and this has helped me a lot to focus all my attention to a particular sector. I've analyzed a lot of companies and now that I know the market pretty well, I can compare companies between them in order to find the best deals.

When I analyze a company, I use two methods:

1) Comparison with at least one similar company. For example, one of my largest holding has a market cap of 130M and it is almost a carbon-copy of another company which has a market cap of 600M. That's the kind of situations I like.

2) Forecast of future earnings. Because I invest mostly in companies that will achieve production in 0-24 months, I try to anticipate their earnings by computing a worst-case scenario and best-case scenario using different metal prices, production costs, etc.

I do this for a few companies and pick the best ones.. I definitely look for a return well over 100% in the next 2-3 years. On all my major positions, my 2-3 years target would result in a 500%+ return over this period, if everything goes right.

[pig4bill]

That's a very difficult game. The small-cap world is infested with scams. The mining world is infested with scams. It's so easy to do because you don't have to be producing anything, just tout your "potential". Put them both together and you get small-cap mining stocks, scam upon scam. A lot of them have "mines" in remote third-world countries, where a favorable assay can be bought for the price of a used Pinto. Getting reliable info takes more than just browsing Edgar and annual reports.