The Small-Cap Investing Handbook Part Seven & Eight: Lessons From Value Investors

Throughout this series, I’m looking at both the benefits, and drawbacks of investing in small cap equities , considering all of the evidence available to us today for both sides of the debate.

When completed we are planning to turn the series into an e-book, which we hope will be a comprehensive guide to investing in small caps.

The series is a collaboration between HVS and ValueWalk’s new Small cap equities magazine Hidden Value Stocks.

To find out more, head over to www.hiddenvaluestocks.com.

For the other parts of this small cap equities Investing Guide series please follow the links below:

1. Part One: Introduction
2. Part Two: The Small-Cap Premium
3. Part Three: Size Matters 
4. Part Four: Quality Over Quantity
5. Five: Peter Lynch’s Rules
6. Part Six: Peter’s Principles

Small cap, the studies say one thing but there’s nothing better than the practical experience. The Hidden Value Stocks newsletter is devoted to the practical experience of managers, fundamental analysis and their views on small-cap investing. Before Hidden Value Stocks came into existence, ValueWalk had been publishing a weekly interview with small, value orientated hedge funds. These funds use a variety of different strategies and some even try to copy the partnership strategy used by Warren Buffett at the beginning of his career.

These discussions brought forward some highly valuable insights, which can help small-cap investors refine their process. So, for this part of the series I’ve gathered together some of the best quotes on value investing, portfolio management and fundamental analysis. Most of these funds are Small cap equities focused.

Small Cap Equities – Cable Car Capital’s Jacob Ma-Weaver

I have a probabilistic approach to valuation. Typically, I will value a business separately under several potential scenarios, which reflect specific outcomes rather than generic bear/bull situations. The goal is not to compare the market price to an artificial expected value computed using subjective probabilities, which I think is often inappropriate given the lack of any information about the underlying distribution. Instead, I’m trying to identify situations where the valuation in even the most negative state of the world remains acceptable, but an alternative scenario is what I think will actually be most likely to happen, based upon my research.