Editor’s note: Frank Curzio lives, breathes, eats and sleeps investing. I worked with him for a number of years – and was often astonished at the breadth and width of his insight into stocks and markets and opportunities. At least as importantly, I like Frank a lot, as a person and as a colleague. He’s won’t tell you something unless he knows it’s real… which is unfortunately unusual.
[timeless]
Q2 hedge fund letters, conference, scoops etc
Below is a piece that Frank wrote about how to make money in small-cap stocks… I like it because it mirrors what I believe.
I enjoy reading investment books.
We all have our favorites, from Peter Lynch’s One Up on Wall Street to The Intelligent Investor by Benjamin Graham. I particularly like Buffett: The Making of an American Capitalist and A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing.
I consider these books required reading for new and experienced investors.
But if you want to make money in small-cap stocks, you absolutely must throw away every investment book you ever read.
These books might make you a better investor. But they won’t make you any money in small-cap stocks.
Here’s why…
In One Up on Wall Street, Peter Lynch wrote, “Earnings drive stock prices”.
In the universe of small-cap stocks, many companies don’t have earnings. Most of the money they generate goes right back into the business. This makes sense, since you need to spend money to grow your business. That’s how small-cap companies become large-cap industry leaders.
If you were looking for earnings, you would have never bought companies like Amazon (Nasdaq; ticker: AMZN) in 1997, Tesla (Nasdaq; ticker: TSLA) in 2010, and Netflix (Nasdaq; ticker: NFLX) in 2009. These industry leaders were small-caps back then. And they didn’t generate any profits.
Amazon is up 131,246 percent since 1997… Tesla is up 1,636 percent, and Netflix is up 8,437 percent. If you followed Peter Lynch’s advice, you would have never had the chance to generate these types of life-changing gains.
In Intelligent Investor, Benjamin Graham says to invest in companies with solid balance sheets that have paid uninterrupted dividends for at least 20 years.
Following Graham’s advice, you would have steered clear of just about every small-cap stock listed in the Russell 2000 index. After all, most small companies do not pay dividends. As I mentioned, most of their cash is reinvested (technology, acquisitions, hiring the best talent) to grow their business.
If you followed Graham, you would have never invested in Microsoft (Nasdaq; ticker: MSFT), Amgen (Nasdaq; ticker: AMGN), or Apple (Nasdaq; ticker: AAPL) when they were small-caps. These industry giants were not paying dividends in their early growth phases.
And you would have steered clear of just about every small-cap stock during the credit crisis, since most balance sheets were shot to bits. That’s a shame, since the Russell 2000 small-cap index is up over 470 percent from the credit crisis March 2009 low.
Warren Buffett says to buy companies with positive operating income for at least the past seven years.
But some small-cap stocks including social media giant LinkedIn and customer relationship management leader Workday (Nasdaq; ticker: WDAY)… were not even publicly traded companies seven years ago.
LinkedIn, with a market cap of US$4.5 billion at the time of its IPO, was purchased by Microsoft in 2016 for US$26 billion… Workday, with a market cap of US$600 million at the time of its IPO, has a market cap of more than US$30 billion today.
You would have missed these huge opportunities if you followed Warren Buffet’s advice.
I could go on, but you get the point: If you followed the rules of investing from the pros mentioned above, you would have never bought any of these stocks.
There are more big money-making opportunities in the small-cap market than you’ll ever have the time to invest in.
But to be successful, throw out the rulebook.
Good investing,
