Earlier this week I took the opportunity to listen to a great portfolio manager give a presentation at a microcap investing conference in Melbourne.
He is one of my favourite Australian investors (probably my favourite), so when he talks I listen.
His personal and professional track records are impressive, to say the least.
This portfolio manager spoke comprehensively about investing in smaller companies on Australia's ASX, things to look for when doing so, and potential pitfalls.
Here are three of my favourite takeaways from his presentation.
- Almost all great investments start small.
When you think of the best investments on the planet, what do they have in common?
Companies like Amazon, Netflix and Apple probably spring to mind. Although they are today's tech giants, they weren't always the biggest companies — they started small.
To an extent, the same could be said of Australia's Commonwealth Bank of Australia (ASX: CBA) or Woolworths Limited (ASX: WOW).
- You don't need to be first
Catching ahold of one of these potential monsters isn't easy. Many people will go a lifetime without getting onto one truly life-changing investment.
However, one of the reasons many people missed out on Netflix's rise, for example, is due to the fact that it had already risen so quickly.
Meaning, shares of a2 Milk Company Ltd (ASX: A2M) have jumped more than 1,100% in five years. Many good investors might see that growth and dismiss its shares as being expensive. However, if the rise and rise and rise of the monsters have taught us anything it's that you don't need to be first.
One big reason good investors think these companies are overvalued can be attributed to our valuation techniques. Specifically, we underestimate a company's ability to grow exponentially over time and in doing so miss a great opportunity.
- "The Opportunity" cost
As anyone will tell you, investing in small companies is a like walking through a minefield to find gold.
Put simply, you should be cautious of company management teams who only talk about the 'size of the opportunity'. You see this all the time in mining, biotech or technology.
Be critical of any company which needs to tout its 'potential for growth' — rather than its actual growth.
Foolish Takeaway
Having been at the investing conference it's clear that 95% of small companies wouldn't stand up to this first-class investor's basic selection criteria, let alone closer scrutiny.
Small cap investing is about how many rocks you turn over, I suppose.
