Micro-Cap
Before I start writing, yes I started a podcast, and yes it is epic. There is a tab on top that you can click on, and the link to my podcast should be on there.
I was chatting with a family friend recently, and they mentioned to me this company called Esstech. This family friend told me that their son-who is in Stern at NYU-told them to buy the company's stock and that I should do some homework on the company. I took a glance or two at the stock, the company itself, and their website, and realized investing in the company is an amateur-ish trap.
Esstech is a micro-cap stock, meaning the market cap is worth less than $250,000,00. Just to put that into context, the average S&P company is 14,400 times larger. I am prejudiced against micro-cap stocks because investing in them is like “investing” in a lottery ticket. The volumes are so small, about 1.5 million, the companies are often young, which violates my IPO rule, and the volatility is insane. Those are stock-side factors, but more real factors impact the company itself.
Take Esstech as our example again, they made 2.8 million in revenue last quarter. That is so little money, that it could be wiped out so quickly, by problems at a manufacturing plant, the shifting of employment, or even something like a natural disaster. When you are a micro-cap company like Esstech, you are always precariously close to death.
One of the core tenets of the stock market is that with great risk comes great reward, but that rule does not hold for micro-cap stocks. The Russell 2000 is a small-cap index, and it has returned an eye-watering 11% over the past five years. Contrast that with the S&P 500 tally of 60%, and you have a significantly riskier investment that rarely - if ever - will return superior gains.
This lesson can be extrapolated across the market, if you choose riskier investments, you risk losing out on the famous compounding effect. Too often, retail traders look for the quick hit of gains on the market. That is not the point of the stock market, you are supposed to look for good companies, and gains over a long period of time. Does that mean you have to buy Coca-Cola stock and bonds for the next 40 years of your life? No, I do not mean you have to be a boring investor, but you have to be wise. Warren Buffett is as rich as he is because of compounding. You are not going to be as rich as Warren Buffett-if you are, send me some-but you can gain lessons from his gain in fortune.
What I am saying boils down to this, you are looking for the junction in the market where reliability meets gains in price. If you look too often for gains in price, you will miss out too much on reliability to make the process worth it, and your money will grow half as fast. If you look too often for reliability, you will miss out too much on gains in price, or other forms of increasing the worth of your position, and your money will grow half as fast. Please be smart. Also, if you have a $100 billion like WB, send me some, the new Call of Duty is not cheap :(.
