ragingbull.altavista.com
By: DNAPassion $$$
Reply To: None Sunday, 30 Jul 2000 at 7:05 PM EDT
Post # of 463
Good Reading for New Microcap Investors,
I have been burn several times, and have been rewarded a few times with these stocks. It hurts when you lose, but it is the best feeling when you win. I think that DNAP is a winner, but who knows? The main rule is... Never invest more that you are willing to lose! This article was a great refresher for me, and I wanted to share it with you while the board is slow. Good luck to us all in DNAP.
It's all good.
DNAP MAN
July 30, 2000
Volume III, Issue 61
Email : info@otcjournal.com
URL : otcjournal.com
To OTC Journal Members:
Rules For Successful MicroCap Investing
For some time we have been planning on publishing a section on the basic rules for
successful microcap investing. The current wretched state of the market offers the
perfect opportunity to review some of the basic rules which will work over the long
term.
We will be placing this edition up on the Home Page as a reference section. You can
refer to it from time to time if you need a refresher course during psychologically
challenging market conditions.
MicroCap Investing- An Overview
In today's market environment most investors define a microcap company to be any
stock with a market cap below $200 million. Market capitalization is determined by
multiplying the price of the stock by the number of issued shares- this gives you the
value which the market is placing on the company.
Microcap stocks do not lend themselves to traditional analysis. There is usually no
history of revenues and earnings from which one can predict future performance. There
are few or no analysts publishing formal financial and price projections. There is
generally very little information from which one can make a "logical" decision to invest
in a micro cap stock. Investing in MicroCap stocks tends to be more emotionally driven.
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 that have revolutionary
ideas but no history of success requires a certain amount of intuition and luck, and the
rewards can be unparalleled when an investment pays off.
Before deciding to invest in a microcap stock be certain that you like the company. If
you have no feel for the company's business model please 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 that we are going to be wrong about some of the companies we
profile. Therefore, you should expect the same.
After reading the section below if you feel that you cannot adhere to these basic
principles please do not invest in microcap stocks. It is not the area for you. We
recognize that this is only one small corner of the entire investment world. However, it
is one that we believe every investor with a small amount of discretionary capital should
be involved in.
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, said 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.
Learn to accept losses. There is a much higher failure rate among micro-cap
companies. Successful micro cap 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 that 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.
lTrading Strategies For MicroCap Stocks
Here are some tried and true trading strategies that have proven successful over time in
microcap stocks:
Never invest the entire amount you are willing to commit on the first trade.
We have never profiled a company that did not trade below our profiled price at
some point in time. Unfavorable market conditions can be excellent opportunities
to add to positions. Also, small companies stumble in the execution of their
business plans leading to depressed prices in their stocks. If they right the ship at
a future point in time this can represent a buying opportunity. If the stock is
trading in your favor you can always add to a position at higher levels if the
company is performing beyond your expectations.
Always use limit orders. Market Makers in microcap stocks are in business to
make money on your trade, and they are ruthless. Microcaps trade less volume
than larger stocks and are therefore more easily subject to manipulation by
market makers. We have often watched market makers fill a market order to the
detriment of the investor. Even if you are willing to pay the current market price,
please place it as a limit order. The next generation of direct execution brokerage
firms will help eliminate the predatory practices of market makers. However,
stocks on the OTC Bulletin Board do not trade within the electronic systems which
allow investors to bypass the market makers. We hope the regulators will make a
change soon.
Never Place an Order to Buy a Stock at the Market Price when it Gaps Open.
A Gap occurs when a stock opens at a much higher price than it closed at the
previous day based on some news or event. When market makers have market
orders for a stock at the open, they will often take the stock up and fill the
market orders at an exaggerated higher price. When shareholders sell into the
newly established higher price the stock will drop back down and fill the price gap
that was created. Market Makers have been using gaps to line their pockets with
money from investors for years. Generally, if you want to purchase the stock that
day, place a limit order at the previous day's closing price. You will nearly always
get your order filled.
Never Sell a MicroCap Stock At the Market When it Gaps Down at the Open.
Traders use the same tricks on bad news. If they have an excess of market sell
orders at the open, they will fill those orders at a ridiculously low price. Always
wait for the inevitable bounce before liquidating your position if the news if bad
enough and you are looking to preserve your remaining capital.
Don't Be Afraid to Add To Positions During Unfavorable Markets. If you have
followed the rules and not committed the entire amount you are willing to invest,
bear markets can be excellent buying opportunities. Microcap stocks will generally
drift down in the absence of buyers, and can drop to ridiculously low levels during
bad markets. Profits can be made when you purchase during those periods of time
when no one wants the stock. As a general rule, a microcap stock will make 90%
of its move up in 10% of the time that it trades. Before adding to a position make
your best effort to determine that the company is still on track to execute its
business plan. Try not to put good money after bad if you can get the information
required to make an informed decision. Don't be afraid to pick up the phone and
contact the company directly.
Take Some Profits When the Stock Is Hot. Since microcaps tend to make 90%
of their moves in 10% of the time there is nothing wrong with taking a profit when
your stock is climbing the charts. One tried and true strategy is to sell 50% of
your position after the stock doubles in value. This allows you to recoup your
initial investment and hold the remainder for the long term with no risk. However,
don't sell your entire position. You never know how high a stock will go.
Conclusion
There is a whole world of investment opportunities in securities and microcap stocks are
just a small part of it. However, they represent the basic tenant of the American Dream.
Hard working entrepreneurial management can use revolutionary ideas and technologies
to make extraordinary returns for the average investor.
We have seen it happen hundreds of times- $2 stocks that go to $50, and $2 stocks
that go to $0. Our challenge is to uncover the hidden gems amongst the 5,000 microcap
stocks that trade. This is the role of the OTC Journal- to uncover those hidden gems
with the potential to go from $2 to $50.
We are only a provider of ideas- You must ultimately decide if an idea we present is
right for you. We will have winners and losers. We have already had several huge
winners. We can only hope that you like something that we profile and are along for the
ride on at least one of our huge winners.
Disclaimer
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readers with factual information on selected publicly traded companies. All companies are chosen on the
basis of certain financial analysis and other pertinent criteria with a view toward maximizing the upside
potential for investors while minimizing the downside risk, whenever possible. Moreover, as detailed
below, this publication accepts compensation from certain of the companies which it features. Likewise,
this newsletter is owned by MarketByte, LLC. To the degrees enumerated herein, this newsletter should
not be regarded as an independent publication.
Click Here to view our compensation on every company we have ever covered, or visit the following web
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All statements and expressions are the sole opinions of the editors and are subject to change without
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solicitation to buy or sell any securities mentioned. While we believe all sources of information to be
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