Learn to Invest Money in Small Cap Stocks and Make Triple Digit Profits (Part Three)

Are you tired of earning 5%, 8%, even 15% annual returns from your stock portfolio? Want to earn triple digit gains from your stock picks? Not only is it possible but it’s absolutely probable with a few solid strategies.

In Part Two of this article, I reviewed the importance of having strict buying rules to minimize your risk when investing your money in small and micro cap stocks. Here, in Part Three, I’m going to further expand and modify rule number two.

Rule Number Three: Don’t try to buy at “perfect” prices.

In buying small and micro cap stocks, know that you will almost never buy in at the “perfect” price. If you’ve researched a company thoroughly and are confident that its price will move upward over the short or long term, then do not wait for a “perfect” price. Chances are you will almost never buy in at a perfect price. Small and micro cap stocks almost always have greater volatility than large cap stocks and inevitably will have days of rapid price spikes upward and downward. And it’s impossible to be right all the time about when these spikes will happen.

Furthermore, the law of averages should even out for you over time when buying into small and micro cap stocks. Sometimes the price will dip after you buy into a stock and you may experience immediate regret. Other times the stock’s price will rise upward from the moment you buy in and you would have never been able to buy the stock at a lower price. But if you’ve applied rule number one, even scenario in which the stock dips immediately after you buy in shouldn’t cause you to lose faith in your stock pick, because it does take a strong stomach to invest like this. I’ve had scenarios where a stock lost 10% on the same day I had purchased it, only to rebound by 60% in the next month.

So instead of using a specific price point to buy a stock that seriously interests you, use a price range instead. Using hypothetical company YYY as an example, if you absolutely love the future prospects of company YYY, determine a price range that you would be okay with after studying its historical price charts. If you decide that you would be happy buying this stock at a range of $2.90 to $3.10, and the stock is sitting at $3, then go ahead and buy.

I know other financial advisors that will disagree with this advice and declare that if the stock’s technical charts show weakening indices, the wait for a dip in price before deciding to buy. Unless those technical charts are negative in almost every index, I wholeheartedly disagree. Technical indicators are never right 100% of the time, often giving “false” positives and “false” negatives. Furthermore, they are even less accurate with volatile small and micro cap stocks because their inherent volatility makes their technical charts harder to evaluate for optimal buy-in prices. If an “unknown” stock’s story eventually passes through media filters to reach the public masses, its price could spike very rapidly without any technical indications. If you’re solely using technical analysis to decide the optimal buy-in price, you’d be left behind in the dust when this happens. That’s why you should determine a buy-in range, and not an exact price.

Rule Number Four: Invest a smaller portion of your portfolio in riskier small and micro cap stocks.

This is a self-evident rule but I’ll review it anyway, because greed sometimes makes even the most rational of human beings do crazy things. I recommend devoting no more than a maximum of 50% of the total value of your portfolio to small and micro cap stocks. Using a combination of micro and small-cap stock picks and safer large cap stocks can help you easily outperform the S&P 500. But when your small and micro-cap stocks really start to outperform the large cap portion of your portfolio, it is inevitable that the following question will invade your mind:

If my small/micro cap stocks are up 75% and my large cap stocks are only up 15%, why not just shoot for 75% gains in my entire portfolio?

The only reason I recommend against this is because, hopefully, from part I of this article, you gained a sense of how research and time intensive the process is of uncovering great small and micro cap stocks. Frankly it’s not that difficult but it does take LOADS of time. If you build an entire portfolio with stocks like these, unless you have LOADS of time to constantly monitor every one, it’s a much better strategy to just boost your portfolio’s performance every year with great small/micro opportunity stocks while also investing in some less volatile ones that will give you a smoother ride.

About The Author

John Kim is the founder of Global Market Opportunities. He has over thirteen years of experience in finance and financial services, and has earned a BA in Neurobiology from the University of Pennsylvania, a Master in Public Affairs from the University of Texas at Austin, and an MBA with a concentration in finance from the McCombs Business School, University of Texas at Austin. To learn how to discover small and micro cap stocks that consistently and significantly beat the market indices, click http://www.globalmarket-opps.org.

Learn to Invest Money in Small Cap Stocks and Make Triple Digit Profits (Part One)

Everyday, there is a new EBay or Microsoft or Dell company that files for an IPO and that will make the early buyers of its stock very wealthy in several years. The trick is how to find them and invest in them safely. Sure a General Electric or Microsoft could possibly have a bump up in share price in one year of 30% or 40% with the release of a phenomenal product or service, but the chances of earning 70%, 100%, or even 300% in one year with large cap companies is quite slim. But it’s not so with small and micro cap stocks. In fact every month, there will be another micro or small cap stock that nobody has heard of that will make loads of savvy investors rich.

So the key is how do you play riskier stocks like this? There are five rules you should always follow. In Part I of this series, I’ll review rule number one.

Rule Number One: Do your homework.

When you find a micro or small cap stock that excites you, make sure you do your homework before making the decision to buy in. Always research the float of a small stock. Why is this important? For a number of reasons. Let’s consider this scenario. You research a small stock ABC that you really like. You discover that ABC only has $10MM of outstanding shares, a float of $5MM because insiders hold the other $5MM, and average daily volume for the past three months of $3.7MM. Well you could be in for a very bumpy ride given the fact that daily volume is averaging 75% of the float (total amount of shares owned by the public). This discovery alone may make you reconsider buying the stock.

Furthermore, if stock ABC has recently had its initial public offering (IPO), then you must absolutely find out when its lock-up period expires. Usually, insiders are restricted from selling off their shares for six months after an IPO. Let’s look at our hypothetical stock ABC again, assuming it is now four months after the IPO. Many times, share prices of companies start falling about two months before a lock-up period expires in anticipation of insiders selling off their shares and flooding the market with volume once they legally can do so. If stock ABC is trading relatively flat and there is no added demand right before insiders unload their stock, an overnight doubling of the stock’s float is bound to dilute the stock price, and possibly do it very rapidly. It’s simply supply and demand at work. There is now twice the supply of stock on the market without any increased demand.

However, let’s look at the flip side. Let’s consider a company XYZ that has $20MM of outstanding shares and a float of $17MM. Positive news surrounding company XYZ has steadily driven its stock price higher, right up until the point the lock-up period for insiders expires. Let’s assume, even though prices have been climbing steadily, that the insiders still decide to cash out and sell off $2.5MM of their shares immediately. Because this company’s float is so small and demand is high, release of additional shares may create a buying frenzy that will drive prices up even more rapidly.

So to summarize rule number one, always do your homework and know everything you possibly can about the stock you are buying. As I’ve demonstrated, in one situation a small float may hurt a stock’s price while in another situation, a small float may tremendously help the stock price.

I’ll review the remaining four rules in the remaining articles of this series.

About The Author

John Kim is the founder of Global Market Opportunities. He has over thirteen years of experience in finance and financial services, and has earned a BA in Neurobiology from the University of Pennsylvania, a Master in Public Affairs from the University of Texas at Austin, and an MBA with a concentration in finance from the McCombs Business School, University of Texas at Austin. To learn how to discover small and micro cap stocks that consistently and significantly beat the market indices, click http://www.globalmarket-opps.org.

© 2006 Global Market Opportunities

Learn to Invest Money in Small Cap Stocks and Make Triple Digit Profits (Part Two)

Want to know what buying strategies to use when buying stocks that can potentially return triple digit gains? In part one of this series, I told you what factors you must consider when buying a small or micro-cap stock. In part two, I’ll review intelligent buying strategies when it comes to buying small caps.

Rule Number Two: Remove emotions from your buying decisions with a disciplined strategy.

Ok, so let’s assume that you’ve done your homework now and discovered a company that you believe will run up at least 60% or higher over the next year. Decide on a predetermined buying price and do not waver from this price. Period. End of discussion.

Why?

Ok, let’s take a look at hypothetical stock YYY. Company YYY is the industry’s leading innovator in a huge growth industry that has seen the biggest growth spurts in history for the last three trailing quarters, yet the general public still does not know about them. In addition, they have patented technology that lets them protect their first mover advantage and high entry costs into the industry gives them nice barriers to entry. On top of all of this, Company YYY is trading at a ridiculously low P/E and a ridiculously low price of $3. In fact, its price would have to appreciate 200% just to equal the P/Es of the giants in the field. You study YYY’s historical price chart and see some volatility, so you decide you will wait until the price drops to $2.80 to get in. But in the two days you wait for company YYY’s stock to drop in price, it unexpectedly shoots up to $5.50. Or perhaps it plummets way below your $2.80 buy in price to $2.00. On no new significant news.

Depending on what scenario happens, you may be thinking “I’m so dumb not to have bought at $3. I guess I’m just going to have to bite the bullet and dive in at $5.50,” or “This is so great. I wanted to get in at $2.80. Now it’s so much cheaper at $2.00 that I’m definitely going to buy now.”

Right? Wrong.

Stick to your original plan. If you throw your buying strategy in the trash and decide to get in at $5.50, you’re letting emotions drive your decisions instead of logic. If you were only willing to pay $3, why would you possibly be willing to pay 83% more for the same stock just 48 hours later? And if we consider the second scenario where the stock plummets to $2 a share, don’t you think that this merits more caution instead of haste? Remember, in both hypothetical situations, we are assuming there is “no new significant news” surrounding stock YYY to justify these huge price movements. Under these assumptions, the volatility of the stock is probably occurring because of jumpy day traders taking profits off the board or dumping shares.

But let’s take a closer look at why letting emotions creep into your decisions is a bad idea. Let’s look at the situation again where stock YYY blew through your designated buy in price of $2.80 and went to $5.00 in two days. Let’s assume you stick to your guns, wait two weeks, and buy-in when YYY stock finally dips to $2.80. Now employing a stop loss of 15% against your buy-in price, your sell-out price of the stock is $2.38 versus $4.68 if you had bought the stock when it spiked up to $5.50. This huge gap in stop-loss price points may very well be the difference between holding on to the stock and earning 80% gains versus selling out 48 hours later and feeling confused as to whether or not you should buy back in.

To summarize, never throw out a pre-designated buying price for a risky stock due to unexpected price spikes. If this happens, stick to your original buying strategy if you still believe in the stock and wait until volatility decreases before you buy at your pre-designated buy-in price.

Remember, there are literally hundreds of stocks every year that make rapid double or triple digit gains. If it turns out that you missed out on one opportunity because the stock soared right through your buy in price and kept soaring higher or the stock’s price took a sudden plunge, know that there are hundreds of other opportunities waiting to be discovered. If the stock you loved so much never returns to your buy-in price, move on. You’ll find a better stock to buy soon enough.

About The Author

John Kim is the founder of Global Market Opportunities. He has over thirteen years of experience in finance and financial services, and has earned a BA in Neurobiology from the University of Pennsylvania, a Master in Public Affairs from the University of Texas at Austin, and an MBA with a concentration in finance from the McCombs Business School, University of Texas at Austin. To learn how to discover small and micro cap stocks that consistently and significantly beat the market indices, click http://www.globalmarket-opps.org.

© 2006 Global Market Opportunities