I believe small stocks are a great portfolio diversifier. They often move in different directions than the overall market, and there is less competition from other investors who discard the sector entirely. That makes the prices of small companies less efficient. That is even more true of special situation investments in small companies. Simply put, there are few people buying small stocks, and few people buying special situations. However, the combination of the two (small special situations) eliminates almost everyone.
That makes small stocks, and especially small stocks undergoing some sort of event (tender, merger, liquidation, etc) an especially fertile place to hunt for great investment ideas.
I liken small stocks to fishing. I live in the West, where open space isn't hard to come by. If I want to go to the wilderness, open space and solitude is relatively easy to find, which is something I've taken advantage of during the events of the last few months. Some (see below) aren't that lucky. For those looking to catch a fish, it makes sense to fish away from the crowds, or others will catch the fish first. I believe the markets are the same way - by avoiding the crowds, investors can catch better returns by not competing with as many other investors.
This is the primary advantage small investors (say AUM <$10 MM) have. Because of liquidity requirements, huge funds aren't able to buy small stocks. Even if they did, the maximum position size they could take wouldn't be meaningful, so they don't bother. That means small investors don't have to compete with larger investors if they don't want to.
I spend all of my time searching through regulatory filings for these ideas, and writing up small companies for the subscribers to The Microcap Review. This is my subscription service, which includes ideas on special situations as mentioned above, plus value investment ideas and net-nets.
The current price is only $27/month for an annual subscription, a price which is going up at the end of the month. I have had many members say that they keep the subscription for the time savings on research alone, as I comb through filings on special situations so you don't have to. The price for new subscribers is going up at the end of the month, but those who sign up for the free trial now will be grandfathered at the current rate, making this a particularly opportune time to try it out. Also, the free trial (with hassle free cancellation policy if it isn't for you) with no billing unless you keep the subscription means its a zero-downside risk investment.
Investments with a margin of safety are my favorite kind, and I'm confident you'll find a free trial of the Microcap Review fits that bill for you.
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