Timothy C. Schewe

I’ve said it many times before – to friends, clients and groups to whom I speak. Investing in small companies is not for every investor. But it is a great investment for those who have what I call the “micro-cap mindset.” Based on years of experience, I’ve isolated at least some of the personal traits of individuals for whom investing in micros is the way to go.

The investor can see macro trends – social trends, economic trends, political and lifestyle trends. Just 24 months ago, few anticipated gas prices well above the $4 a gallon price at the pumps. The few who could see that rising demand for oil from China and India, and the stagnation of refinery capacity in the U.S. would, of course, lead to gas price increases to record highs. These insightful, far horizon investors bet on alternative energy “green” companies as well as just comming into their own small oil and gas producers. (The money we made with Parallel Petroleum and Range Resources over the past few years will pay for our gas for the rest of our lives!) Ethanol is in huge demand, driving up the price of corn, which drives up the price of the foods we eat. Which micro-cap company is addressing this problem and how? Where is the best entry point?

The investor is in synch with business development. The largest gains are made by those who get in early, wait patiently for product or services to reach the market and enjoy the ride up. It could take two years, it could take five years. The ideal small cap investor understands this and is patient in taking his profits off the table.

The best micro-cap investors understand the role of market sentiment and “climbing a wall of fear” that affect market movement and activity. A day does not a trend make. Any chartist will tell you that. Markets move on news, weather – even sports. (You’ve no doubt heard of the “Super Bowl” theory of investing.) These markets move on little snippets of news or a general feeling of unease among investors.

Markets and share price go up; they go down. Nothing in the stock world moves in a straight line. If you understand the wide range of dynamics affecting markets, short-term sell-offs or run-ups are all part of the day’s trading activity.

The best micro-cap traders are lucky. I’m not going to deny it, or play down the role of luck in market success. You know the old adage: It’s better to be lucky than good. Of course, the best investors make their own luck.

The ideal small-cap traders understand their own emotional drives. These drives often lead to buy and sell decisions based on emotion rather than data and core financials. Sort of like betting on the Cubs even though you know they aren’t going to do it. If you’re from the Windy City you bet with your heart, not your logic and common sense.

I believe the best investors know how to maximize their personal strengths while mitigating personal limitations. A trader who does her homework before taking a position and then sells on a whim is strong on research, not so strong on knowing when to sell.

Good investors know their strong points and weak points and recognize these personality traits in the buying and selling decisions they make.

Finally, the best micro-cap traders have a sixth sense. An ability to see a product in a store display window and convert that information into a sensible position in a small cap. Peter Lynch, of Fidelity Magellan Fund fame, used to ask his kids what was hot and what was not and, many times, bought accordingly.

It’s out there, the next big thing. Tech? Bio-pharmaceuticals? The integration of computer and TV functions? What companies stand to make money from the changes you envision just five years from today?

Your imagination is a great road map to investing success. Use your insight, your understanding of D.C. politics or sand shale oil extraction to find the winners three or four years out.

Get in early and hold. Yep, you’ll pick some clunkers, but all you need is one home run to win the game.

And, hey, I’ll drop you a line in a couple of weeks with more sage counsel on small-cap and micro-cap investment strategies to suit any portfolio.

Enjoy the warm weather. I’m headed to the course to try to lower my 28 handicap..