Are Microcaps For You?

Richard Geist is President of The Institute of Psychology and Investing, Inc., established to provide consultation to brokerage firms, money managers, financial planners, and small companies in the areas of management consultation, psychological stress, impact of psychology on investor performance, risk, public relations and marketing, and planner or broker/client relationships. He publishes and edits a micro-cap market newsletter, Richard Geist's Strategic Investing, which integrates the psychological aspects of investing into a five to ten year strategy for selecting small company stocks. He received his undergraduate degree and his doctorate in Psychology from Harvard University and is Instructor, Department of Psychiatry, Harvard Medical School; and Founding Member and Faculty, Massachusetts Institute for Psychoanalysis. He has presented papers on issues such as The Psychology of Investor Mistakes, Psychological Stresses of Managing Money, The Emotions of Risk, Interviewing Management, Herd Mentality, and Broker/Client Relationships. Dr. Geist is Co-Editor of The Psychology of Investing (Wiley, 1999), and on the Board of Directors of the Institute of Psychology and Markets and the Investors Research Institute, and a member of Dick Davis Publishing Editor's Roundtable. Dr. Geist is a also Co-Director of Harvard Medical School's annual Psychology of Investor Conference. He writes independent research reports for small and emerging companies.

The Successful Investor

Most successful micro-cap investors appear to discern risk differently than the average investor. Rather than viewing risk as either chance or consequence of loss, they seem to experience it as de-coupled from loss. They are closer to John Maynard Keynes' 1921 statement that "most of our decisions to do something positive can only be taken as a result of animal spirits...and not as the outcome of a weighted average of quantitative benefits multiplied by qualitative probabilities."

Successful micro-cap investors do not eschew risk, but they certainly seem to emphasize the possibility of reward over risk. What substitutes for risk is the intellectual challenge of studying products, services, and management. This intellectual challenge allows for failure while turning decision making into an art that is enjoyed for its own sake--an art that is accompanied by a strong belief in their own capacities. This is why many successful micro-cap investors avoid diversification as a method for minimizing risk. These investors seem to know that, as Peter Bernstein once said, "diversification doesn't prevent loss; it just prevents loss all at once." Successful micro-cap investors have enough confidence in their own research and decision making that they can concentrate their investments to take advantage of their own investment judgment.

Do I have what it takes?

To decide whether the micro-cap market is the right place for you to invest, try asking yourself the following questions.

1. Am I capable of intuitive, inductive, imaginative thinking?
2. Do I feel comfortable and have the courage to follow my own convictions?
3. Can I tolerate making mistakes and be willing to analyze them?
4. Am I able to step back from emotional turmoil and separate facts from emotion?
5. Do I understand the idiosyncratic lenses through which I'm likely to view the world?
6. Am I able to view risk as an intellectual challenge to solve rather than fear it as chance of loss?

If you are able to answer positively to these questions, you are emotionally ready to take on the task and challenge of micro-cap investing.