Challenging Conditions

Last weekend, I did some yard work at home. I have big trees in my backyard, and apparently, these things try to reproduce.

I’ve arguably been negligent in cleaning up the weeds and seedlings over the last couple of years, which meant I had a full-blown forest trying to emerge.

As you can see in the picture, the previous owner covered a slope in the back of the yard with rocks. The small maple trees were literally growing between the stones.

Some were also growing in the grass, on the edge of the rocky area.

When I started pulling everything out, it quickly became apparent that the ones growing in the grass were pretty easy to remove. On the other hand, the ones growing between the rocks were strong and almost impossible to get rid of.

Their roots were intermingled between and underneath the rocks, meaning I had to lift them while firmly pulling on the stem. I consider myself a fit person, and this rapidly became a solid workout.

Isn’t nature wonderful?

You’d think that growing through cracks in rocks would be one of the most inefficient ways a tree could grow. What I overlooked was how resilient it made these plants. They were much stronger than their counterparts growing in the nicer, grassy, unchallenging area.

I view microcap investing somewhat the same way. It’s easy to see all the drawbacks and everything that could go wrong with microcaps:

• Low liquidity to enter and exit positions

• High volatility

• Precarious financial situations due to challenges in raising capital

• Stock promotion and borderline scams

• Actual scams

• Companies relying on one major product or customer

• Business plans that fail

• And much more…

You can’t assume the market is efficient and buy a basket of microcap stocks without any research, the way you can buy passive investment vehicles in large caps. So much could go wrong.

There’s typically no analyst coverage on most microcaps. Nobody’s going to spoon-feed you the research.

Microcap investing can be painful at times. It requires a lot of manual work, on-the-ground research, and independent thinking.

But those who take the challenge seriously become better investors.

Illiquidity forces you to think longer term.

Volatility makes you question your theses and develop conviction.

Business plans that derail make you appreciate all the risks of investing in early-stage companies.

Running a concentrated portfolio forces you to do the tedious research work.

When you navigate all the pitfalls, the reward is grit and resilience.

That’s why I love to hunt for opportunities in one of the most challenged parts of the stock market. Those who stick with microcap investing over the long term become like those trees growing through the rocks.

They don’t see obstacles; they see opportunities.

They become resourceful problem-solvers.

They develop strong roots that allow them to stand the test of time, come hell or high water.

Don’t run away from challenging conditions; embrace them.

Resilience is born right there.

PS: If you’re wondering, some of these small trees remain firmly planted in my backyard…

---

Disclaimer

This publication is for informational purposes only. Nothing produced under the Stocks & Stones brand should be construed as investment advice or recommendations. Mathieu Martin, the author, is employed as a Portfolio Manager with Rivemont Investments. This publication only represents Mathieu Martin’s own opinions and not those of Rivemont.

If you’d like to invest in small public companies, check out this post.