| | | How to invest in shitcos 101
Investing is like hunting. The nature of what you are after, the terrain and environment it lives in, and the season all make a big difference. But even if you have all that pat, there are still individual differences between what you aim at. To this end, investing in microcaps, biotechs, speculative mining cos, etc is different than trading/investing in SPX, QQQ, or large cap value.
The number one thing you want to filter by is the ability of the company to survive for next 18 months. I'd say double that amount would be ideal, but most shitcos don't have that much cash at hand and you'll be too limited. But anything that doesn't have enough cash at hand to survive for the next 18 months is too risky and should be filtered out.
Number two, if the management feels greasy, stay away. This was (and still is) my number one issue with SMCI. I will not be surprised one bit if over the next 6 months they sink due to "poor financial controls and reporting" and be forced to reinstate their results. When things like that happen, you can lose 50%+ of your investment overnight and no stoploss will help you.
Thirdly, and somewhat related to above, you want longevity. Companies like PACB or CGEN have been around forever. The longer the history, the more info you can find on the risks facing the company and also the more likely that it has competent enough management to squeeze by to the next business cycle.
If you have all this, then focus on the sector. Is the company in a hot (not sizzling) sector. If not, leave them alone. You want something in a hot sector so that they show up search screens and flow of funds lifts them.
Next pay attention to the technicals. Ideally you want to catch the move early after the company has dropped 80% or so. But regardless, remember that these companies move mainly as mean reversion. If they were real trending companies, they would not have remained as microcaps after a decade or more as a public company. Otherwise, be vigilant with where your stoploss is going to be.
Finally, map the company's financials to the macro environment. For example, *all thing equal* you are better off buying something with huge debt when the interest rates are falling than a company with no debt.
Above all, never fall in love with the position. It doesn't matter how great or aspirational the company seems to you. For example I loved BFLY when they were in teens (see the chart below). That didn't stop me from cutting my losses the moment it broke support.
My mantra for that is, "Buy on strength near the green line, and sell on weakness near the red line." See how that worked out?
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