A blog post by TheGladiatorHC on Twitter.
Growing up my parents invested quite a bit in real estate so in my late teenage years I saved to buy an investment property of my own. Coming towards the end of the GFC in 09 the property market wasn’t great in Australia so I was able to purchase a great property for 10% below its market value.
As you would probably know it takes some time to save a deposit to purchase a house so I thought while I’m saving to buy my second property I should see what other ways I could learn to invest and naturally I came across the share market. I still remember the first time I tried to purchase a stock, it’s actually really embarrassing. Let me set the context first, I wasn’t trying to make money, I simply wanted to learn and see if it was something that I found interesting. So I thought I’d throw in a lazy $50 and just start learning. What I didn’t know was that in Australia the minimum amount you can invest is $500 so immediately my buy order got rejected.
Interestingly all my education in the early years were from a stock trading chatroom called hot copper. It occupies something crazy like 90% of the share market for trading chat rooms in Australia so it was pretty much the place to be.
Now at the time I had no idea was a micro-cap or mid cap or large cap was. I just thought stocks were stocks. On hotcopper though the vast majority of the conversations that take place are on micro-cap stocks. So I kind of just fell into it because all the conversations I was reading were for small micro-cap stocks.
So fast forward and I’ve blown up my account twice. Purely because I wasn’t really doing any proper research and I was just buying based on online tips with people using rocket emojis and saying the stock was going to the moon. I never got disheartened though because I knew I was just taking shortcuts. What else would I expect to happen?
So I made a pact with myself to take this more seriously and put together a strategy for analyzing and identifying companies that had a high potential for share price appreciation.
After a few years of doing that I finally broke even, it was about 5 years after I started. So for 5 years I put in thousands of hours’ worth of effort and all I did was make back the money I lost. But again that didn’t bother me, it actually excited me. What else could I achieve if I keep at it?
And pretty much for the last 5 years I’ve just been learning and improving and recently started to try and educate people who were where I was ten years ago on how to approach the micro-cap space and how they can try and avoid some of the mistakes I made.
A high level view of my strategy
I look for under loved, under researched turn around stocks that are run by directors who need the company to succeed as much as I do.
Let’s look at those four individual factors;
Under loved: I’m looking for companies that have really frustrated and fed up shareholders. You find these situations where companies haven’t been performing and the share price has been decimated for whatever reason. I find in these situations shareholders generally are willing to let go of their shares at heavily discounted prices.
Under researched: I focus on the really low end of the micro-cap space, I’m talking $30m market cap and below. In this end of town you really only have retail investors, very niche brokers and some full time micro-cap investors. There are thousands of companies in this space and you don’t have that many people who dedicate themselves to analyzing these stocks. So the competition is low.
Turn around stocks: this goes back to point 1. You’ve got this company which hasn’t been performing, directors have been around for a while and getting a good salary so they kind of tick the boxes but don’t do much to turn around the company. Then suddenly a new management team comes in, changes the direction slightly, starts managing their resources etc and you have a turn around story. Most stale shareholders don’t buy it and just use the new liquidity as an event to exit. This is where I like to come in.
Directors shareholdings: I need the people running the company to need to want the company to be as successful as I do. Not want to but need to. If they don’t have a significant shareholding in the company then in the micro-cap space that’s a huge red flag for me. I’ll give you an example. I was researching a particular company which ticked a lot of the boxes in my investment strategy.
So I started digging a little further into the CEO and found that he was originally appointed in 2011 when the share price has hit a high of roughly $1.70. So I moved on to how many shares he owned and he had roughly 9 million shares, of which he didn’t buy any on market. That was really disappointing because that’s kind of a deal breaker for me but I thought I’d keep finding more out about this CEO. To my surprise I found that he was taking home a packaged salary of $400,000 a year in 2019. Even if we account for inflation he still took home over $3,500,000 in pay over his tenure as CEO. At the time of writing this course the share price for this particular stock stands at $0.006.
So during his tenure the share price had dropped 99% and he still took home $3.5m.
I also generally find that my sweet spot for holding is about 24 months. The key isn’t to holding blindly for 24 months though. These aren’t large caps where you can buy and forget them. You have to be on top of everything that’s happening in the company and the sector.