How can one start to invest in share markets? Anyone who has been following me for a while is aware that I am all about “link-building”, which the media coverage now gives me a big kick in the pants because there are so many links out there. However, I am fully dedicated to moving into stock markets and over the past few years have been trying to learn the nuances of investing.
Because of the nature of my job, I choose to use micro-caps and so the Internet has come in handy a lot. I am only working from home as I have a job but will be spending much of my time learning the ropes. I am lucky enough to live in and be familiar with a wide variety of micro-caps that allow me to really get my head into things and start to understand how some of these companies work, how their models work and what it takes to become profitable.
Meanwhile, my background is in corporate finance, and would argue that the majority of my portfolio is in micro-caps. These will include market cap companies that have market caps of less than Rs10 crore and micro-caps that have market caps less than Rs1 crore. Micro-caps are exciting because they typically have huge opportunities to grow and set great new market share.
The reason that I feel that Micro-caps are not for everyone is that their potential is not fully reflected in the share price. There is a huge range of different characteristics that each Micro-Cap offers and from each company, there is a problem to be solved. Micro-Cap companies are the margins of escape but one cannot reverse engineer all Micro-Cap stocks like a model. One has to know if Micro-Cap companies have sustainable competitive advantages and track records that can help them set healthy share prices.
Micro-Cap companies also have a huge benefit of setting price guides. They give you a consistent price guide every quarter. They give you a linear and predictable earnings report and provide you with historical earnings reports that build a strong baseline on which to set targets. The macro-economic reports and guidance we get from them are much better than reporting numbers from a company that is evolving. We usually do not have robust micro-cap data in India, so it is very hard to build alpha as these prices are volatile and trend-dependent, creating artificial leverage in the name of growth.
My final point is that Micro-Cap companies do not have any limit to their buyback. They can just bring back capital via buybacks. They can get leverage in the markets by using offshore credit and have a very relaxed regulatory framework and favorable tax regime. Current MSCI rules state that you cannot invest more than 25% of your portfolio in micro-caps, but we see Micro-Cap stocks outperforming now because their structures are different and have many attributes that are favorable and we can use fund flows to get into micro-caps. We definitely see our long-term portfolio becoming heavily Micro-Cap tilted in India. That being said, Micro-Cap stocks are not for the all and sundry.
I would add that the most important feature of Micro-Cap stocks is the self-distinction of multi-dimensional assessments that drive operational excellence. New perspectives are born out of a new pragmatism. Go deeper into the fundamentals of a Micro-Cap stock and learn. Stock selection is the essence of micro-caps. There is currently much hype in Micro-Cap stocks and a lot of Micro-Cap stocks lack fundamentals. However, Micro-Cap stocks are attractive as they lead to higher returns over time even though we understand that individual Micro-Cap stocks will go wrong. But as we are growing our long-term global reach, the idea of Micro-Cap stocks is becoming important and that is why we are moving into Micro-Cap-Focused portfolios.
As personal finance becomes an important factor in our lives, I would observe that Micro-Cap stocks are often small but profitable with strong overall operational performance and low costs.
There are Micro-Cap stocks with the high volatility that have huge dividends as part of their strategy. I strongly believe that if you take the right risks, Micro-Cap stocks can provide huge opportunities for growth and the rewards are sometimes well beyond our imagination. The interesting part is that Micro-Cap stocks include well-managed companies with a strong competitive advantage, and effective CMO and sound execution of initiatives and projects, but most Micro-Cap stocks are just volatile and trend dependent which can create incredible gains for a short period.
While there are a lot of exciting opportunities on the market, staying away from niche stocks and Micro-Cap stocks, in particular, is hard. Micro-Cap stocks seem to offer much less information and management certainty compared to very large companies, but Micro-Cap stocks have opportunities for big gains. If you give more attention to these, the gains are worth it. If the only advice I could give to anyone with cash is “give cash to an investor and you will become a larger share of your portfolio value” I think that