Welcome back to your Extreme Small-Cap Profits email course!
If you missed the email I sent you yesterday, this is your 12-day Extreme Small-Cap Profits email course.
I’ve designed this course just for you as a way of saying thanks for being a loyal reader of Money Morning.
Yesterday was Day 1 of your 12-day course.
We went over what small-caps were (stocks under a billion dollars in size).
We also talked about the potential returns you could make investing in small stocks, sometimes more than 1,000%.
Today I’d like to show you who this strategy is for, and why it could be perfect for you.
So let’s jump right in.
Why do we invest in stocks?
To make money, of course.
But why do we want to make money? It’s important to know your ‘why’ before you get started. It gives you the motivation and a goal to work towards.
For many of you, a path to riches is a path to doing more of what you’d like to do.
Maybe that’s not work, but taking the husband or wife on a well-earned holiday. Or it could be to take some time off work and start a career as a writer.
It doesn’t really matter what it is you like to do. Becoming financially free helps you to do more of it.
And that’s exactly what the stock market is here to do. Think of it as a tool. It’s here to help you generate huge returns so you can do more of the things you enjoy.
But instead of waiting decades to become financially free, why not try and speed up the process with small-caps?
In Day 1, we saw the huge potential of investing in small-caps. If you pick the right ones, you could potentially make 10-times your money.
But if there so lucrative, why doesn’t everyone jump on them?
Big money can’t touch them
Truth is, these lucrative investments aren’t for everyone.
Big institutional investors, for example, usually don’t venture into the small end of town. It’s not that they don’t want to.
Just like you and me, these big money managers are trying to get the best return on their money.
But because of their size — many of these money managers have hundreds of millions to put to work — they simply can’t invest in smaller stocks.
Consider Vita Group Ltd [ASX:VTG].
Vita operates those Telstra retail and business stores you see on the street. The company is a small-cap stock with a market cap of just over $265 million.
In the last 30 days, around 700,000 Vita shares changed hands. This was the average volume of the stock over the past 30 days.
If the average price of the stock was $1.70 per share, that means investors bought and sold around $1.2 million worth of Vita shares in the last 30 days.
Now $1.2 million might sound like a lot.
But realistically, you probably wouldn’t be able to buy or sell a quarter of that without drastically affecting Vita’s share price.
Take a look at the following chart.
It shows the actual buy and sell orders on Vita as of 12 March this year.
[Click to enlarge]
As you can see, most of the buy (red bar) and sell (blue bar) orders fall close to $1.48 per share.
Now, say a large institutional investor wanted to buy $5 million worth of Vita (not an uncommon size). That means they’d be buying more than 3.38 million shares.
On the chart, there are only a few thousand orders to buy and sell around $1.48 per share. A $5 million purchase would completely wipe out all the sell orders at $1.48, and then some.
In fact, buying so many shares would likely wipe out all sell orders up until the stock hit $2 per share.
And that’s just if a fund manager wants to get into the stock.
They’ll have a far worse time trying to get out.
I’ll let you in on a little secret. A winning strategy is to buy low and sell high.
But when institutional investors venture into small-caps, they cannot help but push prices too high when buying and push prices too low when selling.
For many large money managers, avoiding small-caps altogether is a far better option. They’re simply not worth the effort.
This is just one reason why small-cap investing could be perfect for you.
Untouched gems waiting just for you
Take a guess how many people follow BHP Billiton Ltd [ASX:BHP]?
Yeah, I have no idea either. But you can bet it’s a lot.
Almost all large institutional investors in Australia follow BHP. Pretty much all superannuation funds follow BHP. Even some international eyes will be on the Big Australian.
With so many people following BHP, it’s arguably a very efficient stock. Meaning, it trades for roughly what it’s worth.
In the small-cap space, things are slightly different.
While there are a lot of individual investors looking at small-caps, most of the large institutions don’t give them the time of day.
As I explained above, small-caps, although highly profitable, aren’t a viable investment for many expert money managers.
Fewer experts in the space means there are far more mispriced opportunities.
You could end up finding a small-cap stock could be trading at half or even a quarter of its real worth.
It’s these opportunities we want to find as small-cap investors.
Could MyFiziq Ltd [ASX:MYQ] be one?
MyFiziq has developed an app that uses picture from your smartphone to create a 3D avatar. The representation is accurate in circumference and all measurements.
Most investors might wonder, why you would need that?
But they probably didn’t think about the fitness, insurance and medical industries, which all need and use such data.
That’s why in the first half of 2017, the stock didn’t do all that much.
It wasn’t until October that investors caught on to MyFiziq’s potential, causing the stock to soar from 4 cents to over $1.5 per share.
Source: Google Finance
[Click to enlarge]
Investors who got in before the stock soared made more than 3,388% in three months.
I’m not going to say these kinds of returns are lying around all over the place. But you could potentially pick up small-caps that could double, triple or even quintuple your money in months.
Of course, you have to know where to look. Don’t worry, I’ll show you that too before your Extreme Small-Cap Profits course is over.
But it should be clear that small-caps are an individual investor’s game.
You could potentially turn a small investment into a fortune. The big money is excluded from playing. All you need to do is find the gems in the market.
Goldmines on the market reserved for you
To recap, small-cap stocks offer huge potential returns and are generally untouched by the largest investors in the market.
This gives us hundreds of potentially profitable stocks to choose from.
That’s why I’d argue small-cap investing is perfect for individual investors, like you.
You don’t need a huge amount of money to potentially make hundreds of thousands. You can get in and out of small-cap stocks because of your size.
You’re buying and selling activity likely won’t disrupt market prices.
In the small end of the market it’s you, the individual investor, who has the advantages. All you need to know is what to look for (which I’ll cover in the days ahead).
Once you can do that, you’re on your way to riches!
That’s it for Day 2 of your Extreme Small-Cap Profits email course. Keep your eye on your inbox tomorrow for Day 3, where I’ll teach you all you need to know about ‘the market’ for small, medium and large stocks.
Editor, Money Morning