Don’t give up on your microcap stock picking strategy when it’s not working. I invest a great deal of time and energy searching for microcap stocks that are under-followed and often undervalued.  Unfortunately, (or fortunately, depending on how you look at it) Microcap stocks have under-performed the broader markets over the last few years.

2015 was one of Warren Buffett’s worst years in his history.  Overall, value investing was just not “sexy” in 2015.  Here are some excerpts from a CNN Money article in December 2015 discussing Mr. Buffett’s year:

  • “It’s been a tough year for most investors – including the most legendary one out there.”
  • “Warren Buffett’s Berkshire Hathaway is on track for its worst year since 2008.”
  • “This year, Buffett is lagging the market.”
  • “The last time that Berkshire had a down year and underperformed the S&P 500 was all the way back in 1999. That year, the S&P 500 gained 19.5% while Berkshire’s A shares fell 20% and the B shares were down 22%.”

2016 started off the year slowly for microcap investors, but I continue to have optimism about a strategy for finding undervalued unnoticed micro-cap companies in the current environment and investing for the long term.

Reversion To The Mean

We all know how quickly things can turn to the upside. When money pours back into microcaps, it can lead to outsized gains, just as cash outflows can sometimes lead to outsized losses. Here is how I sum up the last few years in the stock market.  Reversion to the mean is sometimes painful, yet necessary:

 “Market reversion is painful at first, but should lead to a scenario where active management and stock picking become important again.  Over the last several years, value has taken a back seat to hype, leading to an overvaluation of ‘story stocks’ and ridiculous undervaluation of ‘boring’ stocks. At some point, value will matter again.”

Is it possible that there could be more turbulence before this market finds a comfort zone? Sure. We are in a seven year old bull market and the global economic landscape has shifted significantly. China’s policy moves are playing games with market sentiment, Italian banks are facing challenges, Japan has just implemented negative interest rates, and the Saudis and Iranians are showing no signs of production cuts in oil. But I believe that all of this is good news for home grown U.S. companies that are not impacted by this noise. Negative circumstances will eventually reverse, which should give a nice boost to market sentiment which should then positively impact the microcap space.

Stick With Your Microcap Plan

Sticking with a plan of finding fundamentally undervalued companies with large earnings growth is the strategy I used in 2008 to pull myself out of a crisis with systemic risk – and I think this is again the right strategy for 2016.

In a nutshell, there is no better time to employ a “value plus growth” strategy than when others are sleeping: it’s how multi-baggers are born.