The Secret of the Baptist, the Mechanic, and the Engineer — Small Caps
In today’s Money Morning…when opportunity knocks…glass half full…the seven most-exciting small-caps in Australia…and more…
It’s 1712. You’re sitting in a gentleman’s club in London.
Out of the window, the streets are thronged with passers-by rushing about their business…elegant horse-drawn coaches…and soldiers returning from the wars on the continent.
Across the table from you is one of the strangest men you’ve ever met. His name is Thomas Newcomen. He’s an ironmonger, a Baptist lay preacher — and an inventor.
He’s telling you about one of his inventions. It’s an engine. An ‘atmospheric engine’, to be specific. It’s unlike anything you’ve ever heard of. It somehow turns the energy of a coal fire into movement.
You don’t quite understand it. You’ve no idea if it’ll work. But something about Newcomen’s idea just gets your attention. And he needs your help to get his idea off the ground?
The question is: do you back him?
Don’t answer that just yet! First, fast-forward. It’s 1903. You’re in Detroit, sitting across the table from a wild-eyed mechanic called Henry. He’s pitching you an idea…a new kind of automobile that’ll be affordable for everyone, assembled at a speed that sounds impossible…
But he can’t do it without you. He needs an answer. Are you in or out?
Wait! Don’t answer. Back in the time machine. You’re in California, in the offices of a man called Gordon. He doesn’t know it yet, but his second name — Moore — will one day go down in history.
But that’s all ahead of you. Right now, Moore is talking excitedly about how many transistors he can fit on a microchip. He’s talking about exponential growth. He seems sure. You aren’t. But if Moore is right, everything will change.
His company, Intel, hasn’t gone public yet. It’s small…risky…and its future is unknown. But you have the chance to seed your money in it.
What do you do?
Of course, with the benefit of hindsight, we’d all probably ‘bet the farm’ on all three of these ideas — given they all went on to succeed and change the world in ways no one was prepared for.
But be honest: would you have invested back then? When the risks seemed so much bigger than the rewards and nothing was certain?
How you answer that probably comes back to which story of humanity you subscribe to. Some people see human ingenuity everywhere. They look at our technology…our transport…our medicine…our instant communications networks and they see the triumph of human endeavour.
Some people are the opposite. They fixate on problems…risks…downsides. Their vision is pure doom and gloom, fire and brimstone.
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So which camp do you fall into?
Glass half full
I ask because I think I’m an optimist. A rational one. A realistic one. But an optimist, nonetheless.
As an investor that doesn’t mean you are blind to the risks. It just means your bird’s-eye view is one that has confidence things will work out.
It gives you the fortitude to stick with things when the going gets tough. It allows you to quickly stand up and dust yourself off when you get kicked in the guts.
The volatility of small-cap stocks fills most people with dread, but you can turn that on its head and use the volatility in your favour.
When you expect huge volatility, you are buying when others are being shaken out of their positions and taking some profits when others are chasing the stock price higher.
The volatility becomes your friend rather than your enemy.
Maintaining focus on the optimistic big picture when it’s so easy to get caught up in the day-to-day fluctuations in your P+L is hard. But it’s imperative if you are going to overcome the usual fearful response that most people have when wading into the small-cap space.
If you buy a stock with great potential, you shouldn’t expect it to go up in a straight line from the moment you enter so that you get frustrated and cranky if it goes the other way.
You should expect volatility and not be surprised to be out of the money on the position. That’s what happens. You must remain focused on your reasons for entering the stock and stick with your optimistic outlook that the company will make progress towards their stated goals.
We have all heard hard luck stories in small-cap stocks. My guess is that you have possibly been involved in a few stinkers after taking a tip from a friend at the pub.
It is easy to make sweeping generalisations that ‘The market is rigged’ or ‘It’s only the insiders that make any money in small-caps’ after you have taken a beating.
But the losses are part and parcel of the road towards success. It’s a numbers game. You know you are going to get a bunch wrong, but the size of the winners is usually more than enough to cover the losses, and every now and again you hit one out of the park.
All of which brings me to the point of today’s essay.
The seven most-exciting small-caps in Australia
I’ve spent the last few months on the hunt for the most-exciting, inspirational, and optimistic stock stories in Australia today. I’ve found some cracking stocks…from tiny companies helping fight climate change by turning fossil fuels into clean energy…to engineering firms pioneering ‘smart’ plastics that degrade by themselves…to companies helping move battery tech towards mass adoption.
All told, I’ve found seven specific stocks that I think you need to know about. They’re all small. They’re all risky. But they all have the kind of potential that makes them unmissable — especially if you’re an optimist.
Want to know more?
For Money Morning
PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here