Busting the myth behind investing in small-cap/penny stocks

“You don’t have to invest like a big bureaucratic institution. If you choose to invest like one, then you’re doomed to perform like one.” — Peter Lynch

One advantage of smaller investors is their ability to invest in smaller stocks — a.k.a penny stocks or small cap stocks (<$300m market cap) — notoriously shunned by many.

As they’re riskier, they’re not right for many investors, but these also have higher chances of growing 10-100x. After all, every large company started as small.

When it comes to stock picking, retail investors have an advantage over large institutions — their smaller portfolio size. In most cases, large institutions can’t buy small stocks. And when they can, these stocks have already moved up significantly.

Habits of successful investors: Ian Cassel, a small cap fund manager at IFCM, focuses on four things when looking for new investments:

• A business that can grow through recession.
• A strong balance sheet that can withstand recessions.
• A strong management team capable of running a larger business.
• A valuation that can conservatively double in 3 years.

These qualities focus on quality, upside potential and long-term survival. According to Cassel, investors can cut 90% of the pain of investing in small stocks by focusing on profitable ones. One of the biggest factors — a long term focus:

• Anything can happen in 1 or 2 quarters so give your companies wiggle room and time to mature.
• The best companies invest for the long-term — which is often misunderstood by investors and can translate to poor short-term stock performance.

The goal: Find undervalued companies that can get overvalued — and let them get overvalued. 10% of successful investing is picking great stocks, the other 90% is not selling them.