"Micro-caps are a three-card-monte play. If you don't knowhow to play, stay away."
This is the advice of Greg Sichenzia, a lawyer whose firm services small public companies.
Sichenzia is one of twelve people Dave Gentry profiles in Small Stocks, Big Money: Interviews with Microcap Superstars (Wiley, 2016). I chose the verb "profiles" rather than "interviews" not because I didn't want to repeat a word from the subtitle but because this is not a book of interviews. The only exception is an edited transcript of an interview the author conducted with Bill Hench on his Small Stocks, Big Money TV show.
Gentry is the CEO of RedChip Companies Inc., an international investor relations, media, and research firm focused on smaller-cap stocks. Its main clients are companies who want to increase their retail and institutional shareholder base. So, it is fair to say, he is a small/micro-cap promoter. His book, however, should give the retail investor pause.
Several of the men profiled in this book are active investors. For instance, Barry Honig and Phil Frost invested in MusclePharm (OTCQB:MSLP) "when it was a subpenny stock and hemorrhaging losses. They restructured the company, did a reverse split, and led a $10 million capital raise." (p. 5) And recalling his experience with Interclick, Honig said: "I had grown tired of backing make-believe CEOs and entrepreneurs, so my partners and I went on the board, took a hands-on approach, built the company, and put in a solid management team, then sold the company to Yahoo." (p. 91)
Although Gentry devotes an appendix to pointers for investors who are interested in the micro-cap space (drawn from RedChip's weekly newsletter), the reality is that most retail investors have neither the resources nor the savvy to invest intelligently in individual micro-caps. Fortunately, there are ETFs that track the Dow Jones Select Microcap Index. Over a 10-year period, from 8/31/2004 through 8/31/2015, the index gained 100% compared to the S&P 500 and DJIA, which returned 83% and 72% respectively. (p. 165) Interestingly, as the chart Gentry provides indicates, DJSM outperforms the other indexes on the way up and more or less tracks them on the way down.