Small Company Investing – How It Works

HOW SMALL COMPANY INVESTMENT WORKS

I monitor a number of small company fund managers (good and bad), it’s easy to do when you have Reuters.

Small cap fund managers tend to do the most work (obviously) on smaller companies and are perhaps the only investors who will spend significant time and money ($200K analysts) researching them, and some of them are really good. It changes over time, but it is worth your while looking up some of the best-performing small-cap fund managers (if small caps are your thing) and seeing what they are doing. Just Google it, they are not shy about telling you how good they are. Morningstar collates a lot of information on fund manager performance, so you might start there. Another way to filter is to find a small cap company that has done really well and go and have a look at what fund managers are on their shareholder's list. Chances are they know what they are doing. Then go and check out what else they hold.

Don’t get too hung up on the fund managers that perform well, the bad ones have some good stocks as well. And they all have their reasons to buy the stocks, all of them will have some good and bad stocks.

Either way, when you find a fund manager of interest, go onto their website, you don’t need Reuters, and sign up for their weekly or monthly emails and reports (they love handing them out) and through those they will give you quite a bit of detail on what they have been buying and selling and often some videos talking about how to invest and what they have bought.

If you didn’t already know, the golden rule of funds management (especially in small cap funds management) is to “Buy something then tell everybody else about it”.

If a fund manager is going to spend a month interrogating, visiting and investigating a small or Microcap company, decide to buy it, and then buy it, then it is absolutely in their interests to then go and tell everybody else about it. And they do. You will not find a small cap fund manager on a website or in a conference who isn’t promoting what they already hold.

Google “Microcaps you have to hold Australia” and see what comes. You will find a host of small cap fund managers spruiking their holdings. Some great ideas delivered by the fund managers that have actually done the work you can’t.

Some of you old hands might remember the story about Rene Rivkin telling subscribers to the Rivkin Report to buy Adednego Mining in 1998. Meanwhile he was selling it into a very illiquid market. It was the story that began the cynical assumption that everyone in the finance industry (the smart money) was exploiting the dumb money (retail investors). But it does not apply in the small cap world. Fund managers cannot trade smaller companies. If they buy them they are buying them for the long term not for a trade, because there isn’t enough liquidity. If a multi-million, let alone a multi billion dollar small cap fund manager was going to do the work and decide to buy a holding in micro, small, or even mid-cap companies, often involving taking a 5% stake (substantial shareholding), they are not trading they are investing, and whilst it may seem immoral to then go and tell everybody about it, the truth is that having done the research and decided it is a good investment, they are probably doing you (as well as themselves) a favour. You just have to keep reading their monthly reports and staying on top of the substantial shareholder notices to spot when they start selling it. They won’t make a fuss about that!

Anyway, here is a list of some of the better performing smaller companies that I have been monitoring this year. You might find some ideas to chase.

Along these lines you might remember the story I told about my young brother-in-law who joined a stockbroking firm in Melbourne back in 1995 and got sat next to one of the legends of the Melbourne broking world, near the end of his cycle. He told my brother-in-law to sit down and shut up and not touch anything until 11 o’clock. At 11 o’clock he took him out for a coffee and told him how to be a stockbroker. It involved this formula. “Find a stock trading at less than one cent that has half an idea, buy millions of it, and then spend the rest of your broking career marketing it”.

It works. I used to work at Patersons with a young stockbroker in Melbourne not so long ago. At that point I had been in broking for maybe 25 years. He joined the broking firm as a beginner and spent 10 years there. I now read that he went off to set up his own business looking after high net worth individuals as well as family offices. He found a company with half an idea, an Australian tech company based in Melbourne. Henry wrote about it last week. If you look at the substantial shareholders listing, he is now worth between $50m and $60 million in this one stock alone. Applause. Well done that man. It makes earning a commission as a stockbroker ($100 an order for seven years of liability and the house takes 55% of that, and that’s before tax) look like a joke if you get the right side of a rising share price in size.

Good luck. It only takes one good idea a year to make a good year. It only takes one good stock a lifetime to change your life.