In today’s Money Weekend…lockdown blues…opportunity in small-caps…the future of money…and much, much more…
I’m starting to go a little stir crazy in the sixth Melbourne lockdown, I have to say. As the meme doing the rounds on Facebook says, the hardest part of a seven-day lockdown is the first three weeks.
I was excited about a Sunday lunch with a bunch of friends at my favourite restaurant, Cicciolina in St Kilda, when the lockdown hit, and we had to cancel.
My 50th is coming up in a couple of weeks and many plans have been binned. A week in the Whitsundays with a big group of friends from all over Australia has been whittled down to me and my dog Max cooking a steak in the backyard.
But the upside for you is that I have been working nonstop researching fascinating companies. What else is there to do?
I started in this game on the floor of the Sydney Futures Exchange and my outlook on the markets was shaped by that experience. I got a sense of the chaotic volatility that traders are faced with.
I saw legendary traders make millions and then lose it all over a few years.
It was technical analysis that helped me make sense of the chaos by pointing out the recurring patterns that were really a reflection of the recurring mistakes that traders make.
My trading plan involved taking advantage of the mistakes that other traders made to set myself up in no-lose positions.
I was trading the indices, so I wasn’t focused on fundamental analysis. I was focused on understanding how to manage risk and create favourable risk/reward situations in an incredibly volatile environment.
The lessons learnt during that period are an incredibly important part of my approach to investing and trading these days. But there is more to investing in stocks than an understanding of risk management.
Opportunity in small-caps
I was naturally drawn towards the small-cap sector because I knew that’s where the big returns were. There is less competition from the large investors, not much high-frequency trading going on, and if you managed to find a stock before the masses, the potential upside was off the charts.
I could use my risk management techniques honed on the futures floor to enter positions in the highly-volatile small-cap sector and set myself up in no-lose positions. Basically, planting low-risk seeds into the stocks that I thought could blast off and then sitting back to see what happened.
As I started to delve into the sector, I started to realise just how fascinating it was to spend my time researching small-caps.
With companies that aren’t even earning money yet, the task of valuing them is fraught with difficulty. Using traditional fundamental analysis techniques was useful to a point, but there was more to it.
It was more holistic than plugging numbers into a model and coming up with a valuation. It was more of an art than a science and I love putting the pieces of the jigsaw together.
We live in an age when the barriers of entry to small players is crumbling. There are huge shifts occurring across the board due to digitisation. Climate change pressure is tearing down old industries and creating new ones.
Environmental, social, and governance issues have reached a tipping point and consumers are changing their behaviour. Small, nimble companies can reap huge rewards as moribund companies chase their own tail.
The rise of fintech companies in Australia, for example, is starting to gather steam. Consumers are just starting to cotton on to the fact that they don’t have to get a loan from one of the Big Four. They are also receiving great service via the new technology being rolled out by small-cap companies that are hungry for more clients.
This is the era of the small-caps.
They are taking on the big players in industries that have been sewn up for decades and winning.
When you study the opportunities before some of them, the mind boggles.
The future of memory
I have just released an alert to buy a company working on a new form of memory for computing. Flash memory is starting to reach its limit. It isn’t a valid solution for chip designs below 28nm (nanometres). A new type of non-volatile memory is needed as technology continues to advance.
The small-cap company I tipped has been working for years on a solution and is nearing the pointy end of their endeavours.
When you consider how huge it would be if they are the solution necessary to allow the development of IOT (Internet of Things) and AI (Artificial Intelligence) applications in future, the decision to put a few bucks in and see what happens is compelling.
Even if they don’t manage to succeed, I reckon there will be ample opportunity to take some profits at some point along the way to create a free option. But of course, nothing is guaranteed.
The task isn’t working out whether or not their technology will succeed. The task is to work out how large the speculative opportunity is and whether there is the potential is to set yourself up in a no-lose situation at some point, so you won’t get hurt if things go pear-shaped.
I’ll tell you who they are next week, so stay tuned.
Below you’ll find my ‘Closing Bell’ video where I discuss the moves in gold and bitcoin, and show you a lithium stock and an explorer to put on your watchlist.
For Money Weekend
PS: Watch the latest episode of my series ‘The Closing Bell’ on YouTube. Click here or the thumbnail below to view it.