HBlodgett – If you have been investing in microcaps for 7 years I am sure that you would agree that the period, 1997 – 2000, was not typical of normal performance for these stocks. The mo-mo period produced unusual activity in them that is no longer common.
While I agree that a microcap doesn’t have to have 100% or 1000% growth to achieve 100% or 1000% price growth, it does hinge on standard pump and dump procedures (or irrational exuberance to borrow a phrase) to do so. It isn’t a matter of sustaining that type of move because I have never seen a stock sustain that type of price spike without a concurrent equal increase in revenues and earnings. The difference between these and successful long term stocks is that they don’t hold the price gains. The result is that they are only useful to swing traders who are willing to watch them constantly on a daily basis and be prepared to sell if and when the spike occurs. This is speculating as opposed to investing.
I can’t agree that a person doing what you describe with microcaps is investing. The time element isn’t the controlling factor but it is indicative. Gambling, or speculating if you prefer, is exactly what you are doing. There is no analysis involved since there is most often nothing or little to evaluate. You are depending on momentum resulting from some event that has little to do with the true value of the company to cause a price spike that is out of proportion to a rational valuation.
Investing on the other hand is based on an evaluation of the company and the premise that the company will sustain its price growth by increasing revenues and earnings. Cash dividends are also often a factor. Capital preservation is also a goal of investing. While the market has ups and downs over short periods, a long term investor putting money in good companies expects with reasonable confidence that the stock in a company will be worth more as the years go by. This is not always the case but with some degree of diligence he can keep himself protected from large losses without having to devote a large amount of time watching his stocks on a daily basis.
I do know a couple of successful day traders but they spend 10 hours a day, every day working at investing as a job. This isn’t really investing since it isn’t a matter of letting their money work for them. Instead, it is a job or small business if you wish, and they are being compensated for their time. Most investors have other jobs and interests and are not willing to devote that type of time, nor should they. BTW, neither of them would touch an OTC stock with a ten foot pole.
While re-balancing or “asset allocation” is widely practiced, it is most often promoted by those who benefit financially from “churning” portfolios. There is a difference between “re-balancing” to fit some formula and selling a stock for valid reasons. Overvaluation of a stock whose price has grown faster than is justified by revenue and earnings growth is a valid reason to sell and invest the money elsewhere.
I don’t think it is callous to suggest that everyone should take the time to learn to invest wisely. It is one of the most important things in every person’s life and should be treated accordingly. Diverting one’s attention by dabbling in microcaps for short term gains is more likely to result in short term losses for most people.
AI
