Every now & then, I receive a comment or an email, the gist of which is usually the same. To paraphrase, the message is usually something like “Hi there, I like your writing, but I wonder why you take the time to look at these companies. It seems like a lot of effort, when you could just invest in Tesla, Bitcoin, or an index. Why bother ?”
To be sure, there are many ways to make (and lose) a dollar, but for me, the investing process has never been only about making money. I have always been the kind of person that wants to know how (or why) something works. Personally, there is always a great deal of satisfaction in the understanding of something, as understanding usually leads to confidence, which in turn leads one to repeat the process, and hopefully learn a bit more. For those that are wondering why I “do what I do”, here’s 10 reasons why I continue to take the time to do my own research, and invest in the small, the ugly, and the underfollowed.
The Apple IPO is long gone. As is Netflix, Tesla, and Google…. On any day of the week, you will be bombarded by news about major companies, most of which are the current “darlings” of the market. Don’t get me wrong – I use the services of most of them, and they are fine companies. But I would venture to say that both you and I never had the opportunity to invest in the IPO for any of these. OK, maybe you did, but then I have to ask why you’ve landed here, as it would seem you have more money (and perhaps better connections) than myself. In any case, while these companies have made vast fortunes for those that invested early, most of us “regular folks” will never get the opportunity to “get in early” on companies such as these. While you are unlikely to find the next Apple, it is not impossible to find a company that can provide returns that are 10x, 20x, or even 50x your initial investment in the small cap market. Not only have I seen this happen, but I have seen it happen more than once, and I have been invested in companies like this – more than once.
The small and micro cap market is the home of inefficiency. The flip side to being bombarded by news about Apple and Tesla is the fact that you will almost never see any news about Macro Enterprises, Vitreous Glass, or Pyrogenesis – unless you go looking for it. All of these companies were totally accessible at prices affordable to the smallest retail investor, and were found primarily as a function of “sniffing around” the small cap marketplace for interesting opportunities. Two of these (Macro and Vitreous) signaled their opportunity well in advance, and provided the opportunity to invest at compelling prices for months. Arguably, Pyrogenesis was more difficult to read, but has nonetheless provided investors with enormous upside. While each of these companies are markedly different from one another in both industries and management styles, they were all found in the same place – the small and sometimes very inefficient TSX Venture.
Small company CEOs will actually talk to you. This point should be taken with a grain of salt. Tim Cook will never talk to you – Apple is just way too big, and you are just another peon wondering what the future holds. But that also means that Tim Cook will never tell you gilded tales of future company success – at least not to you directly. The good (and bad) thing about small companies is that you can actually get in touch with the CEO, and he or she will actually talk to you. This I have learned firsthand. Many times, I’ve had to peel myself off the phone, as I get nothing but smarmy proclamations about how awesome the company will be, at some time in the future. But other times have been very interesting, as small company CEOs are often thrilled that an investor is actually calling them. While they won’t offer up “insider” information, sometimes a lot can be gleaned from fairly innocuous conversation. I once recall speaking with the CEO and CFO of a small cap company whose share price had been steadily gaining ground. The shares had risen significantly, but based on fundamentals, they should have been much higher, and were still well under $1.00. I explained that I was a shareholder, that I had a substantial position (for me), and that while I was happy with the share price gain, I was concerned that the market wasn’t recognizing the true value of the company. There was a long pause, and then the CEO asked if I had sold any shares. I said no, as I thought it was too early. He paused again, and then said “good”. This struck me, as in all the calls I had ever made before, nobody asked me how many shares I held, or if I had sold any. He didn’t communicate anything that wasn’t public knowledge, he didn’t talk up the company, and he didn’t say that I shouldn’t sell, he just asked a question that is typically never asked. I don’t remember the rest of the call, but the tone of his answer stuck with me. I held, and was very happy I did. The shares went on to reach much loftier heights, and one of the reasons I held was because of that phone call.
Not only will they talk to you, they may actually give you a tour. I will freely admit that this is not like getting a backstage pass to your favorite band, but for investment geeks, it is pretty cool. At some point in time, you will end up looking at the financials of a company whose operations are actually in (or close to) your hometown. If that company is small, then there is a chance that you can arrange a tour. This is another thing that I have learned from firsthand experience. Sometimes, a tour is superficial, and you learn nothing – but sometimes it gets right into the guts of the operations. I once recall touring a small waste processing facility, and let me tell you, I was right in the thick of it. It wasn’t particularly pretty, but it was small and efficient. The fact that my guide, one of the senior management, owned a sizable chunk of shares made it even more significant. When he was walking through the plant, he wasn’t just looking at a bunch of machinery, he was looking at things that would make his compensation better – or worse.
You will probably learn something that’s not “investment” related. Unless you unfailingly invest in only one industry, you will probably be exposed to different sectors that are new to you. Sometimes the lessons are directly related to the sector that the company operates in, and sometimes they will seem to come out of left field. When I first started investing in small Canadian energy companies, I came across the term “break up”, and had no idea what it meant. Was there a love interest that I was unaware of ? I just needed to ask, and discovered that “break up” and “freeze up” are related terms which refer to how passable the Northern parts of Alberta are on a seasonal basis. Crews are unable to move drill rigs in the latter part of the year until after winter “freeze up”, as the muskeg literally needs to freeze so that the equipment won’t sink. In the spring, if they want to move equipment in or out, they should do so before “break up”, as the muskeg starts to thaw. From the telecom sector (Total Telcom to be specific) I learned that even though one often sees diesel trucks idling for what seems forever, that idling is actually bad for the engine, and causes excess carbon buildup, which in turn causes that ugly black diesel exhaust. One of the products Total has developed controls an ancillary heater that allows the cab and engine to stay warm, without actually running the vehicle. As the saying goes, you learn something new every day – or perhaps with every investment.
You will also learn to recognize errors that are investment related. One thing about learning to manage your own investments is that you will discover (eventually) that big name brokerages and companies with fancy investor presentations will make mistakes. This is not to say that these mistakes are malicious, but at the end of the day, people are human, and humans mess up. This too I have learned this from experience. My brokerage once sent me a tax slip which classified a very large, one time return of capital as an eligible dividend, which had significant tax implications. More recently, take a look at the statement (below) from the audited financials of a company that currently trades on the TSX Venture. If you can make the numbers add up to the circled value, I will send you a prize – seriously, I’m not kidding. If you can make those numbers add up, I tip my hat to you!
It’s your money. Most people reading this post probably work, so most of you can identify with the concept of trading your sweat for a dollar. Regardless of whether you turn a wrench or plunk away on a keyboard, you are using your finite life as a mechanism to gain some of those almighty dollars. Last time I checked, your life (and mine) was worth something, because that money you earn is the result of you giving up some of that finite “life time”. The truth is that once you give that money to someone else, they see it as only money. When you hand over a fist full of dollars to someone to manage it, you have effectively handed over part of your life. Some of those managers are good, and some aren’t. While you might not be the best money manager (to begin with), you will learn, and you don’t have to go full tilt from the beginning. Start small and learn. One thing is certain, and that is the fact that you will always have your own best interest in mind.
Bernie Madoff is still out there. OK, so he really isn’t out there (he is still doing time), but you don’t have to live in New York to fall victim to a good scam. Not that one should be paranoid, but charlatans abound, and they come in all shapes and sizes. Bernie Madoff dealt with all sorts of high rollers, as his client list included none other than Kevin Bacon and Steven Spielberg, but the point is that you don’t have to be famous to lose money to someone dishonest. Take it from me – I know. When I first started out, I briefly subscribed to a newsletter known as “Buy Low, Sell High”, which eventually wasn’t worth the paper it was printed on. The publisher of that newsletter, Al Budai, was eventually banned from working in the industry, as he was simply running a better version of the classic “pump & dump”. More recently, a former CFL player was convicted of fraud, as he used his persona & charm to convince people to invest in his “non-profit”. The truth is that if you walk into your local bank and buy index funds, you won’t get ripped off – but there are lots of other folks out there that are interested in doing so, and they are a persistent and charming bunch.
You will release yourself from the yoke of the financial services industry. Let’s face it – the financial services industry has no interest in a “smart” you and is much more interested in the “clueless” you. I recall a meeting I had with a rep from my bank, whose job it was to convince me to invest with them. He showed me all of their mutual fund offerings and told me which ones he thought would be best for me. I then asked him a pointed question about the funds, specifically, had they outperformed any particular benchmarks over the last 10 years? He very kindly pointed me to the annualized return number, and I asked again, did this represent outperformance or underperformance? After a deep study of his own shoes, he admitted that he wasn’t sure. Now, I don’t know if this was just a function of him being really nervous, not actually knowing the answer, or not wanting to admit that the funds had actually underperformed, but the point is that one shouldn’t pay for underperformance. A reasonably intelligent individual who decides to manage their own money will start small, learn from their small mistakes, and eventually know why they are under or outperforming – and they will have learned something. Over the long term, such an individual is just as likely to perform as well or perhaps even better than what their local bank is offering.
Lastly, most of your returns will be normal – but some will make a huge difference. Investing in small and microcap companies is not an immediate ticket to riches, despite what Instagram or TikTok might be telling you. Some investments will make money and some will lose money, but if you are doing your homework, the winners should outpace the losers. However, when one goes long on a small or micro cap company, the really “fat tails” live only on one side – the upside. Yes, you can lose 100% of your capital, especially if you are sloppy and are not really researching and understanding the companies that you invest in. On the other hand, if a small company does well, you can make much more than the typical market return. When one finally crystalizes a gain that pays off the mortgage (or something as impactful), it creates all sorts of options – which is probably “why I bother” to invest in these types of companies to this day.
For those with questions, comments, or their own “Grey Swan” stories, I can be reached at firstname.lastname@example.org.