Sometimes not having a plan is awesome.
But being without a plan when investing in stocks is a bit like walking in prison naked and blind - scary. If we are to live a life of freedom, we need an absolute focus and discipline.
In my previous post I mentioned two components I think are essential to stock investing: capital to invest and knowledge to pick stocks. To have capital, you either need to get money from somewhere or repeatedly make money, which you can then funnel to stocks. To pick the right stocks, you have to understand the business and the stock market. In short, both are hard to obtain (but not impossible).
Throughout my 20s, one skill I always excelled at (and loved doing) was sales. What I love about sales is the unlimited earning potential. With the right opportunity and a great product or service, you can consistently make money, as long as you put the work in.
Obtaining knowledge is a different story. You can read books about stocks, watch videos or listen to audio, but you don’t really see results until you purchase stocks (in our case).
Comparing earning money vs stock picking, it’s obvious what’s more important. If you are making 10 thousand per month and your stock ROI is negative, you won’t be getting far. Thus, it’s not the input that really counts (bringing money is), it’s the output that matters (funnelling that money to the right stock).
So how do we shorten the learning curve while maximising ROI?
We prioritise speed over safety. We purchase stocks many don’t. We take on markets that offer high returns but also pose high risk.
Cue in micro-cap stocks. Or, as I like to call them, public-market startups. Companies with market capitalisation between $50 million and $300 million. Stocks that can go up 50% in one day or crash to zero in a few days. But why micro-cap stocks? What makes them more attractive in our scenario?
Feedback! Imagine investing in Google today. You have done all the calculations, you understand the business model, and you are certain of the ROI. Trouble is, you won’t really get an answer until a few years in. Why? Because mega-cap stocks like Google move slow. They are (almost) immune to world events, internal affairs, buyouts and similar.
However, now think of a company that just started on the stock market. Their coverage is almost non-existent. They trade in smaller volumes, which means bigger institutional investors stay away. A management decision, a product launch or even a potential lawsuit can considerably swing the stock price in a few hours. In other words, feedback is almost instant.
But fast feedback is only one part of the formula. We also require growth. Let’s check the data. India, a fairly uncharted territory for the average investor has few indexes. For this comparison, we will look at the following:
- Nifty 50 (the fifty largest Indian Companies)
- Nifty Mid-cap 150 (companies ranked 101-250 on Nifty 500)
- Nifty Micro-cap 250 (top 250 companies beyond Nifty 500)
From Apr 2023 until Mar 2024, Nifty Micro-cap 250 returned an impressive 84% gain. Nifty Mid-cap 150 returned 62%, while Nifty 50% returned 36%.
But of course, one year on the stock market is merely a drop in the ocean. How would micro-cap stocks perform over centuries? Well, the larger the time scope, the less data we have. Again, not many news outlets and analysts cover micro-caps. But here’s the catch. Do we really need a 10-year overview?
Remember, we are building a life of freedom. Researching micro-caps is time-consuming. I don’t know about you, but in 10 years, I want to hold quality businesses, not speculate on what the next unicorn is.
So here’s the plan. Maximise earnings from my sales job, obtain as much knowledge as I can about quality businesses, create “the micro-cap fund”, and get out there and test my thesis.
What about you? What is your plan?
If you think this is something you would like to try, join my Inner Circle. I am in the phase of collecting applications, but in essence, it will be a small community of stock investors (100 members max) sharing ideas and supporting each other. Apply here.
See you in the next post
-Anze