To OTC Journal Members:
 

Confessions of a Serial Microcap Investor

I wrote a similar article in 2003. The market was turning back up at the time, and stocks were coming off severely oversold conditions after a fairly nasty 2 year bear market.

I confess- I am a serial microcap investor. If a friend calls with an idea, I often own the stock before I know the name. I just know four letters and have an idea why I own it.

I have the psychological make up to handle losses. I realize they are part of the landscape, and have learned to embrace them. I know that one loser takes me a step closer to a big winner. I know that losers are like cancer. They can be painful and cause significant emotional damage. They cause you to question your judgment. Selling a loser and getting it behind me can be a cathartic and emotionally renewing experience. It allows me to turn the page and move on.

In light of the recent market melt down, I thought it might be a good time to review some of the characteristics of successful microcap investors. There is an article entitled Rules For Successful Microcap Investing on the OTC Journal web site. It is written by Dr. Richard Geist- PhD in psychology from Harvard, and author from several books on the psychology of investing. His latest book, Investor Therapy, is a must read. It was published in 2003- you can get it at www.Amazon.com.

Here's an excerpt from the OTC Journal web site concerning successful micro cap investing: The full article can be accessed by Clicking Here.
 

Dr. Richard Geist, Harvard PhD in psychology, long time observer of the psychology of investing, and contributing editor to the OTC Journal, says there are four primary factors that contribute to success in the micro-cap market: Financial understanding--knowing how to evaluate a company's performance and its management. Experience--a good intuitive feel for products and services that will impact society. Luck--unpredictable good fortune blessing a few of your holdings. Psychology--understanding enough about yourself to avoid emotional mistakes. The most successful microcap investors make decisions more from the gut than the head. Investing in the unpredictable futures of companies with revolutionary ideas, but no history of success, requires a certain amount of intuition and luck. The rewards can be unparalleled when an investment pays off. Before deciding to invest in a microcap stock, be certain you like the company. If you have no feel for the prospective company's business model, simply do not invest. Never invest on the basis of a hot tip or the advice of this newsletter. We will continue to come up with about eight ideas each year, but you must make the ultimate decision. It is your money, and you will suffer the consequences of any loss and enjoy the benefits of any gains. We already know we are going to be wrong about some of the companies we profile. Therefore, you should expect the same. After reading the following section, if you determine you cannot adhere to these basic principles, please do not invest in microcap stocks. It is obviously not the proper investing arena for you. We recognize this is only one small corner of the entire investment world, however, it is one we believe every investor should be involved in with a small percentage of discretionary capital.  Basic Investing Rules For MicroCap Stocks Here are several rules to which you must adhere to be a successful microcap investor: Never invest more than you can afford to lose. Since microcap stocks are highly risky, only a small percentage of your assets should be committed to microcap stocks. Consult a professional licensed financial advisor if you are unsure about a suitable amount to invest in this high risk end of the market. Be prepared to invest with at least a one to two year time horizon. Peter Lynch, one of the most successful fund managers of all time,  stated that he made his best returns starting the second year he held a stock, often waiting five years to fully maximize his profits. While one month might seem like an eternity to a short sighted investor, one year is a small fragment in the life cycle of a successful company. A specific example is Comverse Technologies (NASDAQ: CMVT). One of our editors traded this stock in 1987 at $.375. Today (July 28, 2000), the stock is trading at $78 ($234 split adjusted) after a 2:1 and 3:2 split. It would be interesting to learn if there are any shareholders who purchased this stock at $.375 in 1987 still holding it today.  A 10,000 share purchase for an investment of $3,750 in 1987 would be worth $2,340,000 today. (this was back in '03). Learn to accept losses. There is a much higher failure rate among microcap companies. Successful microcap investors have to develop the capacity to tolerate a loss. You must be secure in the knowledge that a few really large winners will result in success. Most unsuccessful investors become pre-occupied with their mistakes, blaming brokers, analysts, company management, or the OTC Journal. Successful investors expect mistakes. Most successful investors enjoy the process of investing as much as they enjoy making money. Stocks can go up infinitely, but they can only go down to zero. Therefore, whenever you invest for the long-term in a microcap stock, your upside potential is much greater than your downside risk. Learn to Tolerate Bear Markets. Microcap Stocks, as with all stocks, will always trade both higher and lower than you ever thought possible. We go through extended periods of time when market conditions are unfavorable for microcap stocks, which can be psychologically damaging to undisciplined investors. Because microcaps generally trade less volume than their bigger brethren, market makers can manipulate price levels in their favor in both up and down markets. The absence of buyers in microcap stocks during a bear market allows market makers to drop prices dramatically on very little volume. High percentage pull backs on light volume in a microcap stock can be excellent buying opportunities. However, in order to take advantage of such opportunities you must have capital, the courage of your convictions, and the patience to wait for an upturn in market conditions. You must discipline yourself against allowing the psychological impact of tough market conditions to affect your belief in the future of the companies you own.

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