Small Cap Investment - Chasing the next emerging blue chip

Why small caps? 

Well, every current blue chip company was once a small cap.
Great acorns too came from small seeds.

Small caps are out of institutional radar, and they are too small.

As such, these is one area where the astute individual investor can have an edge over the Goliaths by being early and nimble.

Investing in small caps can lead to multi-baggers, but of of course not all selections will be successful, and some will become worthless. Therefore, one must adopt a portfolio approach to such investing.
However, to fully realize their value, positions must be held for long periods.
It is like a farmer sowing the seeds, and letting successful acorns mature fully.
This requires a long period. as such, the starting point must be a macro view of a mega-trend, or themes that can last for years.

Such macro themes that are still running includes:
- Emergence of emerging markets, and especially China
- Decline of $USD
- Unsustainable US Debt situation
- Approaching of retirement of baby boomers in the developed economies of US, Europe, Japan

In Ian's books, his formulation for screening potential winners are as follows:
Small Cap Investor Book blog

Step 1:	Growth Trends: Identify growth trends and market sectors positioned for rapid growth in the years to come.
Step 2:	Finding Potential Winners: Screen more than 7,000 publicly traded companies to find those companies that are unknown performers that are positioned to grow.
Step 3:	Fundamentals Matter: Understand the fundamentals of the potential investment, including products, services, and management’s ability to run the business.
Step 4:	Financial Performance: Review and evaluate key metrics in a company’s financial statements to understand historical financial performance.
Step 5:	Earnings Quality: Look for red flags that indicate financial manipulation or fraud to avoid investing in a small-cap lemon.
Step 6:	Growth Outlook: Develop an understanding of expectations for growth to make valid valuation comparisons.
Step 7:	Technical Analysis: Understand the technical indicators of share price movements to help timing of investments, and maximize profits while limiting losses.
Step 8:	Pulling the Trigger: Determine the optimal timing for entering new positions by using effective trading strategies.

Posted in: Strategy