We all dream of doing it…
Finding that next big thing. The next Fortescue, the next Amazon, the next Netflix, the next whatever…
The kind of life changing investment that can make you rich. Or at least fund a nice round-the-world trip!
And here’s the thing.
Those investment opportunities — though certainly in the minority — are out there.
In fact, I’d say from experience, every two years or so, the stock market throws up a huge opportunity in the smaller end of the market that gives you a decent shot at investing glory.
The chance to get on certain stocks that make huge returns.
Don’t believe me?
Well, let me prove it to you…
10 stocks in 10 years
Let’s start in 2009.
The GFC had just hit, stock markets had plummeted and everyone wanted out of shares. I should know. I was a financial advisor at the time and it took all my persuasion to keep my clients invested in the markets.
The overriding emotion was fear.
But then the central banks of the world rode to the rescue. The money printing began. And this era of money printing has turned into a 10-year bull market for many junior gold miners.
Gold producer Northern Star Resources Ltd [ASX:NST] was trading at just three cents in 2009. Today it’s at almost $10 per share!
Another gold miner Evolution Mining Ltd [ASX:EVN] hit a 10-year low in 2009 at 20 cents. Today it’s around $4.
There was one key trend that enabled these results…
The link between increased government debt and increased demand for gold as a hedge against government money printing excess. Many other mining stocks rose at the time too, thanks to a huge China stimulus package.
Then in 2012, after the initial post-GFC surge, the stock market was starting to get a bit nervous again. A lot of stocks fell.
But as always, there were still big opportunities in small stocks in the right sector. This time healthcare was the place to be.
Respiratory research and development company ResMed Inc [ASX:RMD], started moving up in early 2012 at $2.50 per share. And it’s been moving steadily higher ever since.
Today it trades at $14. A nice 5.6 times your money.
You could have made even greater returns in fellow healthcare stock Nanosonics Ltd [ASX:NAN].
The ultrasound equipment and infection control specialist started rising in 2013 and went from a low of 43 cents, to almost hitting $4 in 2018.
In 2015/16 we had the great lithium boom.
As Elon Musk’s Tesla Inc [NASDAQ:TSLA] started to turn the electric car future into a reality, suddenly the importance of this oft-forgotten material came to the fore.
Small-cap lithium miner Galaxy Resources Ltd [ASX:GXY] went from 12 cents to $4.40 in three short years. Altura Mining Ltd [ASX:AJM] went from 1.4 cents to 48 cents over the same time period.
In 2017, as the battery metals trend developed, cobalt stocks started to rise too. Artemis Resources Ltd [ASX:ARV] rose from four cents to a high of 59 cents in less than a year.
2017 also brought a boom in fintech and blockchain stocks.
Yojee Ltd [ASX:YOJ], a blockchain-based logistics company went on a run from seven cents per share to 34 cents in only nine months. Crypto advisory firm, DigitalX Ltd [ASX:DCC] soared from three cents to 42 cents in the same year in line with the cryptocurrency boom.
2018 was a big year for the emerging marijuana industry and that seems likely to continue into 2019. This trend is mainly on the back of a changing political landscape in Northern America and a growing awareness of the benefits of medicinal ‘pot’.
For example, cannabis company Elixinol Global Ltd [ASX:EXL] has more than doubled in price since just August 2018.
Like I said, no matter what, the market never tires of throwing up huge opportunities for the prepared.
Invest with foresight not hindsight
Now of course everything is clear in hindsight.
But I’ve shown you this list of small stock successes for two reasons.
One: to prove to you that huge gains are possible in the stock market. It’s not just one or two stocks every decade. There are hundreds of opportunities like those above.
But to find them you have to account for the second point. Which is…
Second: to show you that it’s the underlying theme that’s more important than the stock itself. At least, this is the case at the start of a new trend.
I could have added many more stocks in each of those themes that all rose higher together.
Finding and investing at the start of these big moves is what matters most. Looking for what I call collision points — the intersection of several trends to create a new super trend — is my specialty.
And it’s what you should look at first too if you want to make big gains in the small-cap space.
Let me finish off with five tips to find these small-cap winners…
Three tips to investing in exponential stocks
- Look for the start of brand-new trends. Technology, demographic and cultural shifts are usually good places for Australian investors to look first. Government policy — both our own and foreign countries like China and the US — can also throw up some ideas, especially when it’s a change from the status quo.
- Invest as widely as you can. A lot of the time, you’ll lose money investing in small-cap stocks. That’s just a fact of life. You increase your chances of finding an exponential winner by spreading your investments. And always remember this is the high-risk part of your overall portfolio.
- Take profits along the way. A lot of the stocks I listed above have fallen a long way from their previous highs. Now they might rise again, but if you are a buy and hold investor, it can make it easier to hold through the down times, if you’ve taken some profits along the way. In fact, I think trying to build a portfolio of ‘free carried’ small-caps is a great way to build your ‘big gain hunter’ portfolio. This means if a stock rises by 100% from your buy-in price, sell half your holdings and keep the remaining half invested.
Small-cap stocks are not for the faint-hearted. It’s almost inevitable that you’ll be sitting on losses from time to time. Sometimes big ones.
No one tells you that, but it’s the price you have to be willing to pay to get onto the big winners.
You have to think like a venture capitalist in many ways. And realise that if you can find just two big winners out of 10 investments, you can still make money. Sometimes very big money.
Only a select few people in this world can understand that, but it’s the truth behind getting in on the ‘next big thing’.
Contributing Editor, Money Morning
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