Fundamentals

RISK TOLERANCE

Microcaps are inherently risky investments. There is no shying away from it, if you are looking for “safe” (until a recession hits) low return stocks then you’re at the wrong place. These companies are all about the upside, picking stocks that can increase well over 100%. By default, none of these are mature companies. I personally have had multiple 2-3 baggers, with some of these trades closing in spans of less than a month, some of them over 4-6 months. Nearly all of the stocks on the TSXV are microcaps, with many being less than $1 a share. A 1 cent change for a 10 cent stock is a change of 10%, but it’s only 1% for a $1 stock, and 0.01% for a $100 stock. When buying Canadian microcap/penny stocks it is very important for one to be prepared by having the appropriate risk appetite. Any young person between 25 – 60 should definitely consider investing in some of these stocks where you absolutely get a chance to earn more than the slow 5% dividend per year you find in stable blue chip dividend stocks. As a young person, high returns will increase your bank account at a much faster rate, and you have time and ability to take this risk. As the age old adage goes: “no risk, no reward”.

OBJECTIVES

The first rule is to have a clearly defined objective. What is your goal with these high risk investments? Is it to diversify your portfolio and find quality juniors, or is it to make a quick buck and jump in on those 10 baggers? Both are good reasons, as far as we’re concerned, it just means you have to adjust your game plan accordingly. Many of the successful gainers see price increases of over 10-20 times their initial investment. Finding companies like that is the ultimate goal of every investor in this space. While searching for the big hitters, it is important to realize that in a small basket of high quality microcap investments, only a few will experience these gains. It’s also important to have loss tolerance, as some may go the other way. This is part of the game, and one needs to discard the old mentality that we’re used to when investing in large caps. We’re in a totally different world here, and the key to success is diversification.

DIVERSIFICATION

It absolutely imperative to diversify your portfolio. Buy a variety of different stocks. The process of diversification requires that one be very selective in order to maximize the probability of a high quality investment. Doing research and picking high quality investments can mean the difference between having few companies in your penny stock portfolio succeed or having a number of them succeed. Coming here is the best decision you’ve made to take step in that process. It takes some time and effort to get good information on a company and do the due diligence, but the result of making that investment is the difference between a superior and an inferior basket of stocks.

TIME

No 2 companies are alike. Some companies are growing rapidly, and you will see that reflected in the stock price. Others will be a longer term play. My first ever 2 bagger took me over 6 months of holding the stock before it’s stock price finally appreciated over 100%. Depending on the sector, stage of development, and market sentiment, the time it takes to get the stock appreciation may vary. Persistence will pay off, and sometimes one needs to hold a position for longer than expected to get their sweet returns. Be patient, most of the stocks on the TSXV have very low liquidity, and as a result you will see many days of almost no movement. Again, this is not like the large cap world, but if you want out-performance in your portfolio and want exposure to microcaps, this is another part of the game.

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