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Who doesn't want the upper hand when it comes to investing? Of course we all do, especially when we're putting our hard earned money on the line. And I firmly believe astute small-cap investors have that upper hand when they take advantage of short-term market inefficiencies. That's been the subject of Small Cap Investor Daily
issues this week, and it's critical that individual investors heed the advice.
As I wrote in yesterday's issue, another factor that individual investors can use to their advantage (or demise) is the powerful effect of emotion. The combination of these two ingredients, inefficiency and emotion, can help small-cap investors make explosive investing gains. This is what we try to accomplish with every stock added to the Small Cap Investor PRO portfolio, and so far we have a pretty good track record.
Between 2004 and 2008 we rode True Religion Apparel (NASDAQ: TRLG) for a 2,218% gain. And right now were sitting on gains like 105% in our China agriculture stock, 68% on our natural gas stock, and 26% on our electronic payment terminal stock. We also just added a high potential $80 million market cap company that is providing governments world-wide with secure ID cards.
With each of these investments we've added companies that are largely undiscovered by Wall Street analysts. And I'd like to offer you the opportunity to take advantage of a limited time offer to join our group of independent investors at 50% off the normal subscription rate to Small Cap Investor PRO!
In fact, I wrote an entire section in my book about how individual small-cap investors can find profit opportunities by taking advantage of market inefficiencies and emotion. I've included a bit of that chapter in today's issue.
***The stock market in 2008 and 2009 was in the heart of the maelstrom resulting from debate over the bailout of several major financial institutions, ongoing credit problems stemming from sub-prime mortgage write-offs, and growing unemployment indicating a recession. Here's one headline that topped the business section of a prominent daily newspaper of the time: "Persistent Anxiety over Tight Credit Sends Stocks Plunging." The bedrock of that headline was the word "anxiety." Variations of this theme could be found daily in the fourth quarter of 2008 and beyond.
Investor emotion—particularly with regard to the herd mentality of the market—can move mountains. Of course, that emotion can derive from empirical data, but that's not to suggest that every investor's and institution's gut reaction to the same bit of information is going to be identical. In a sense, that's asking for a far more robotic pattern than humans can ever be expected to follow.
In the interest of being as balanced as possible, there is more truth to the efficient market theory (discussed in Tuesday's issue) today than when it was first posited some 40 years ago, if only due to the speed and broad access of the Internet. The trouble is the theory really has little to do with the hypothesis itself. The explosion of the Internet and the proliferation of computers and portable devices that display information have contributed to the fastest sharing and dissemination of investment news and analysis ever. So in that sense we enjoy the efficient communication theory. Beyond this, we have no more efficiency today than in the past. Markets have always been chaotic and always will be.
Bottom line: In an economy based on perfect information, all participants consistently act in a completely rational fashion. Hop onto your favorite Internet financial site. What are the basic elements? Perhaps the Dow Jones Average is careening up or down. Maybe it's news about some giant company announcing layoffs or meeting (or failing to meet) earnings expectations or the financial and economic forecast for an entire nation or region.
Traditional news outlets have only so many resources and space with which to report what they deem to be of significance. When multi-billion dollar behemoths announce important developments, news that is every bit as important to small-cap stocks tends to go by the wayside. Or at the very least it becomes buried in the back pages.
The media focus on the most popular companies with the largest followings. These typically are larger companies, given their well-known brands, large market capitalization, and extensive number of shareholders. In the media business, it's all about attracting a large audience - the bigger the better. That because media companies generate most of their revenues from advertising.
For example, Pfizer has 16 analysts following it. By contrast there are dozens of promising small-cap pharmaceutical firms out there that have little or no analyst coverage. Look at Lotus Pharmaceutical (OTC BB: LTUS), a company we've followed here in Small Cap Investor Daily. Next to no analyst coverage, even though the stock has risen 780% since March of 2009. Think of just how quickly media outlets would spread Pfizer-related news versus that of a smaller player like Lotus.
Even today, individuals like me who have built a career investing in small cap socks still have to proactively seek information on small caps. When it comes to larger firms, the news somehow always finds us.
This is where the small-cap investor can profit. Do your own research. Look for news, and buy when the fundamentals and valuation tell you the stock is a winner. If you're an early and immediate buyer, you'll be likely to see a steady increase in your investment value as the news becomes well known by other investors.
While investing information is much more accessible than it was even a decade or so ago, accessibility doesn't by definition mean that every individual investor or every institution is going to access it. Or for that matter treat it and react to it in an identical fashion. While technology has made information increasingly accessible, the fact remains that it is still human beings who are pushing all those buttons.
We see things differently. We react differently. We prioritize information in different ways and with different results. And, we all make mistakes. As a diligent investor, you want to avoid the mistakes that other investors make. Mistakes borne of focusing just on the big news at the expense of less visible data that, when interpreted properly, can result in remarkable investing profit. Taken in concert with the flaws of the efficient market theory, you need to investigate sources of information that point you to those small-cap stocks flying under the radar.
***If you'd like to receive formal stock recommendations for companies that my research team and I expect to be top performers, I encourage you to sign up for a half price subscription to Small Cap Investor PRO. Just click this link to get started today and join our community of independent investors.
