Microcaps and small caps: what are and how to invest

What are small caps?

 

Small caps are public companies smaller than the market average.

Although small caps are usually considered to be those with a market capitalization of less than 1 billion, the truth is that this figure refers to the value assigned by the market, which in many cases does not necessarily is the real size of the company.

Therefore, the most important magnitudes that define the size of a company are sales, assets and number of employees.

They tend to be quite stigmatized companies, being considered high risk, due to their small size.

However, if we select the right companies, most of them usually offer a much higher profitability than the rest of the market, which is much more mature than small companies.

Anyway, I’ll tell you a few things about small caps:

 

First. All best companies in the world started once as microcaps.

Yes, Amazon was not born as a Trillion dollar company.

In the beginning, Amazon was a microcap.

 

Second. In microvalue we will try to select the best microcaps of the planet.

Not the bad ones. The best ones.

Wherever you are. No matter the industry. No matter the country.

 

The reason by which microcaps have had better performance than big caps is quite simple.

When a business grows in absolute terms, the smaller the numbers, the greater the growth in relative terms.

Let me explain.

Although it may not seem so, the business that grows from 1 to 2, grows much more than the one that grows from 15 to 20.

Not in absolute terms. The first one grows only 1 unit and the second one grows 5 units.

In relative terms, absolutely. The first one grew by 100%, while the second one grew by only 25%.

Easy, isn’t it? It is pure mathematics. It doesn’t admit too much discussion.

 

In addition, microcaps trade fewer shares in the market. They are more illiquid.

This aspect moves away a large part of the market and only leaves place for the individual investor.

Something that most people see as dangerous and a risk, the intelligent investor sees opportunities.

 

You are no longer competing against Warren Buffett or BlackRock.

Investing in Apple you do. Day after day.

Imagine competing with the prettiest and nicest guys on the planet for the girl you like.

Imagine competing with the prettiest and nicest girls on the planet for the guy you like.

I don’t know about you, but I don’t like competition. It gives me an incentive, but I don’t like it.

In microcaps you have no competition.

You don’t even have analysts following the companies.

No one understands it or invests effort to do so.

Why? No matters, it’s just a microcap.

When the company starts capitalizing billions, that’s when the competition will start to come in.

Be an intelligent investor: don’t wait for the competition.

All this absence of shareholders who know much more than you and me, and of analyst coverage, makes microcaps unknown.

And this creates a lot of inefficiencies.

Inefficiencies of all kinds, but especially in terms of price.

 

In short, this is how multi-baggers (companies that multiply their share price several times over the time) are created:

1) Through growth of its sales (remember, growing from 1 to 2 is much more than growing from 15 to 20).

2) Through the expansion of profit margins (by gaining size, a multitude of synergies are generated and costs are diluted).

3) Through the expansion of the multiple of its profits (as new investors come in and it begins to be covered by analysts).

All this is achieved when you go from small to medium. From medium to large.

It doesn’t admit too much discussion.

 

 

How to invest in small caps?

 

In the same way as in large companies: through your broker or your bank.

If you want to train and learn how to invest in the world of small caps, register at microvalue, the Small Caps Club.