My dad had a big influence on my choice to make a living by investing in stocks. As a teenager, I remember spending week nights with my Dad watching the Nightly Business Report on PBS, building my love affair with the stock market. I became attracted to the idea of looking for management teams to invest in, sitting back making money by letting them do what they do best, and eventually learned that first mover advantage is one of the keys to success.
My introduction to microcaps began when my Dad would occasionally emerge from his “stock cave” in the basement. He would tell me about a great company he found that I never heard. Then it would end up quickly doubling! When I finished reading “One Up On Wall Street” by Peter Lynch, given to me by my Dad, I knew I wanted to invest for a living one day. I eventually learned that my Dad gained a competitive advantage, whether he knew it or not, by investing in Microcaps because it gave him a ” first mover advantage ” (FMA).
First Mover Advantage
You don’t have to be a genius to gain a first mover advantage. You simply have to be aware of following three things:
- Know what pieces of information move prices like earnings, contracts and changes in risk profiles
- Know where to find information in places that most retail investors are probably not looking such as SEC filings, conference call transcripts & fee based research avenues.
- Learn how to interview management teams
Your goal is find an information arbitrage:
An arbitrage exists when a disconnect between stock prices and available public information on a company is noticeable, and monetarily worth pursuing. Sometimes, the mispricing of micro-caps can be substantial.
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Research, Research, Research!
The microcap universe is a great place to exploit information inefficiencies. You are in a playground where over 50% of stocks are microcaps. That means you are avoiding competition from institutional investors who are performing their research in larger capitalized stocks. Your primary opponents are individual investors. And they may not have the time, resources or expertise to give you a run for your money. Simply stated, you will be handsomely rewarded for hard research by getting into stocks before the crowd finds them.
Sorry, but if you thought great research ends at reading press releases and watching the talking heads on CNBC then you are probably going to be a fool, rather than a great investor.
Peter Lynch is quoted as saying:
“I work about 70 hours a week, and my average competitor works probably 50 hours.” “So if I’m working 40% more a week than my competitor, I figure I ought to be able to beat him by 10%.”
Quick Tips to Secure Your First Mover Advantage
The first mover advantage reveals itself in the nooks and crannies of the microcap and even small cap space. When you invest, try to approach the research process in the microcap space like an institutional investor would.
Sources of information– Many investors will just rely on press releases to perform their research. Looking in other not so obvious places will give you a leg up. Live conference calls and related transcripts offer an endless source of information that management omits from press releases. Also, don’t be stingy. Spend a little money on fee based sources that retail investors normally won’t shell out the cash for. This is one of the best moves I ever made. It gave me access to loads of great info and make my research process more efficient. (Reuters and Valueline)
Reliability of information– Places like Yahoo Finance and many stock screeners often don’t possess the most reliable information on microcaps. Furthermore, microcaps do not disclose non-GAAP financial data as much as larger caps do. Taking the time to do your own math to determine the true earning power of a company will be your advantage.
Interview Process– Many retail investors are simply afraid to call management teams. But it’s one of the most important steps in the research process. Being prepared and following a planned protocol is key for me. The more I know about a company the better I am received by management. Go through SEC filings to understand the business. I typically ask questions I know the answers to, to see if management knows their own business.
Don’t be shy- At some point you will need to have the “guts” to take chances when your research has uncovered the clues that others have missed. It is easy to doubt yourself thinking, “what did I miss? Why don’t others agree with my findings?” You need to get to the point where you trust yourself and show that confidence by placing bets.
I went through this process when I disclosed to GeoInvesting.com members that I bought Meritage Hospitality Group (OTCQX:MHGU) in June 2015 as one of my longer term holdings. The company buys under performing Wendy’s (NMS:WEN) locations and “dresses” them up to increase sales and margins. I pitched the idea to some friends. They said I was crazy to buy into this boring stock trading on the “risky” over the counter market in a struggling industry. Well, since then, the company has paid several dividends and is now trading at an all time high of $18.50, rewarding shareholders with a near 120% return on their investment.
If you are a full-time investor or working towards that goal, I really urge you to find your first mover advantage. It might be the best thing you ever do. Just adding one or two percentage points to your annual returns can be extremely beneficial to your portfolio over the long-term.