This is another old article I wrote for my uni investment club. I’ve learnt a lot since I wrote this piece, especially after working part-time during uni in a extremely well run microcap fund. (Although I am currently working full time as a management consultant, my interest in stocks and investments have never waned). An update to the below article:

• My previous thinking to the advantages of micro-caps and small caps to uni students are just plain wrong.
  • 1) Cheaper brokerage cost per share does not create any advantages because on an absolute basis (the brokerage cost itself), there is no difference between microcaps and large caps. To effectively evaluate brok
    erage cost, you have to see it as a % of total amount.
  • 2) Amazing price growth potential is just looking at 1 side of the coin. Microcaps are by nature a more volatile and less liquid asset class than large caps. Hence, while it can have amazing price growth, it can also turn the other way very suddenly (as I have found out firsthand). The impact a large buyer/seller has on the share price is more pronounced in micro caps due to its illiquidity. Nevertheless, you can turn this proverbial lemon, into your lemonade. Due to the large swings in price, if you do your work and have patient money, you can find some undervalued gems.
    Some large-cap fund managers found out the high volatility the hard way when large swathes of insititutional money came to the smaller end of the ASX markets over the past few years. Now, they have reversed the tide and pulled the money back to the large-caps, leaving large falls in price in some microcap shares.
• The only advantage that I think microcap has is that due to its structure, it is more inefficiently priced and attracts less large/more sophisticated investors
• My portfolio is now predominantly micro caps and is more or less a highly concentrated portfolio. I am in Warren Buffett and Charlie Munger’s camp:
  • “If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. If it’s your game, diversification doesn’t make sense. It’s crazy to put money in your twentieth choice rather than your first choice. . . . [Berkshire vice-chairman] Charlie [Munger] and I operated mostly with five positions. If I were running $50, $100, $200 million, I would have 80 percent in five positions, with 25 percent for the largest.” Warren Buffett
• I hardly go into commodities investing. This is perhaps due to lack of research and my general laziness, but I have always found it a strange business where you can do everything right and have the lowest cost of production and the right deposit, but you are still at the mercy of the commodity price

It’s a bit of a long one, so without further ado here it is below…

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