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I wanted to tell you a little bit about the investing style of PeakStocks.com and what I am trying to accomplish. This includes how we’re going to make money, potential risks, and what type of investments I look for.
- A Quick Take on What PeakStocks.com Does
- Our Advantage Over Wall Street
- What Kinds of Companies Will We Invest In?
- Sounds Good. So What’s the Catch?
- How We Will Mitigate Risk
- In Conclusion
I. A Quick Take on What PeakStocks.com Does
Here’s what you’ll get from this site:
- Easy to understand, real-time (email or RSS feed ) buy/sell recommendations, newsletters, updates, research reports and blog postings that can be easily digested by a novice investor or a seasoned veteran.
- Long-term, market-crushing stock picks taken from mostly micro-cap and small-cap stocks. (See: Our Advantage Over Wall Street)
- The promise and commitment from me that everything I am telling you to buy, I also own. (See: What Kinds of Companies Will We Invest In?)
- Full disclosure of the potential Risks and how we will Mitigate Those Risks.
- The assurance that I will only recommend a stock or post to my blog when there is something relevant to say or a company to recommend. Finding great companies to invest in doesn’t happen every day. Likewise, if I post to my blog, it’s important. Otherwise, why do it?
- Because I wanted to be fair to my motto of purchasing everything that I recommend on this site, I am starting from scratch in tracking my performance so as not to skew things from past gains.
II. Our Advantage Over Wall Street:
Where does the average investor (that would be us!) have the largest advantage over big Wall Street firms, hedge funds and the large-scale market forces?
By thinking SMALL…
According to SmartMoney Magazine, “In 2000 … more than 7,600 companies were covered by at least three analysts. Today, that number is below 6,000.”
As we know, the ratings that analysts assign to stocks are sometimes dubious at best, but nonetheless, analyst coverage on stocks influences their price a great deal by drawing attention to them.
So as analysts are scaling back their coverage of Wall Street, what types of companies do you think they are following less and less?
That’s right, the smallest companies.
In fact, more than 90% of the thousands of publicly traded companies that have no analyst coverage are small caps.
So how can we profit from this trend?
In several ways:
1) Because micro-cap and small-cap stocks usually don’t trade very many shares each day compared to larger companies, and are smaller than the Apples and Starbucks of the world, it’s very difficult for large Wall Street players to get into them, even if they are GREAT companies, because any large scale purchases by these firms thereby makes the stocks rise in price, thus defeating the purpose of owning their shares!
2) At the same time, because the large players cannot trade easily in and out of these stocks, Wall Street firms and analysts that could produce research on them (Buy, Hold and Sell ratings), have little incentive to do so because they follow where the money is.
If not a lot of people follow a certain stock, there’s less chance for them to make money on their reports, or to garner investment-banking relationships with those companies.
So, the bottom line is this: by investing in small companies early in their growth cycles BEFORE Wall Street catches on, we can ride them over many years as they grow and become more and more popular but before they get overvalued, overhyped, and expensive because everyone knows about them or is investing in them.
Remember, there’s a reason large-cap companies are “stable” and “safe” investments: it’s because they don’t move in price very much!
That means your money will NEVER grow as fast or gain as much over time in large companies as it will in small companies that are growing faster than their larger counterparts.
Take for example large companies that you know about today like Microsoft, Apple, Wal-Mart, etc.
EVERY one of them started out as a small company that grew and grew over many years, in fact decades, to become what they are today.
That’s where real wealth is created: owning a small, compelling and fast growing company with sound fundamentals that will grow over many years and increase your initial investment many times over before it’s all said and done.
Show Me Some Examples:
Here’s a comparison of the average returns you would have gotten from 1927-2005 had you invested in the Overall Market, Small Cap Value, and Micro Cap Deep Value stocks (courtesy of MoneyChimp.com):
|
Annualized Inflation-Adjusted |
|
|---|---|
| Total stock market: | 10.01% |
| Small cap value: | 15.37% |
| Micro cap, deep value: | 17.28% |
Of course it should be noted that these types of returns were calculated under an ideal scenario assuming many variables, but the point it clear: investing in micro-cap and small-cap stocks before they enter their true growth phases, or while they are in them, has proven over many decades to far outgain the overall market’s return.
On PeakStocks.com we’ll stick to investing in, and researching, mainly micro-cap and small-cap stocks that are largely underfollowed by Wall Street AND offer us a compelling value.
We’ll be going after a hybrid of GROWTH and VALUE. This is how we will CRUSH the market over time.
This also means we won’t go chasing certain stocks just because they have gone up a lot or are getting extensive press coverage.
My job will be to preserve the wealth we have, and take calculated risks to increase that wealth when the opportunity arises.
Now that’s not to say I won’t invest in large companies (I’ll invest in anything that can make us money!), but for the most part, I’ll be sticking to smaller companies that we can invest in for years to come that will provide us continued growth that far outpaces the market.
III. What Kinds of Companies Will We Invest In?:
In the interest of holding a slightly diversified portfolio (more on this later), the companies that I will be following and recommending will come from all walks of life.
These picks can include beaten down names and high-risk picks that have become out of favor with Wall Street, as well as small companies in niche industries that are rarely covered or not widely known.
And yes, sometimes I’ll be recommending a company that everyone knows and has heard of, but that presents us such a compelling value, or risk/reward potential, that it’s too good to pass up.
In addition, although my picks can come from any industry or sector, you’ll notice that I specialize in stocks from the Technology sector.
What I Look For:
Below is a quick rundown of what I typically look for in the stocks that I invest in:
- Companies in a niche field, emerging market, or that have some other significant advantage going forward
- Companies that are out-of-favor or have been beaten down, but that still show promise going forward
- Growth potential that exceeds the market or sector
- Solid management that owns a large percentage of the company (their interests are aligned with ours)
- Solid margins, cash-flow, and use of capital
- Compelling value (risk/reward) at present price
I won’t bore you with the details of each item, but suffice it to say that everything I recommend on my site is deeply thought-out and researched.
And to prove that I’ve done my homework, I will also own EVERY single stock that I recommend on my site.
IV. Sounds Good. So What’s the Catch?:
Ah yes, the proverbial catch. Well here are a few things to think about BEFORE investing in anything that I recommend on this site:
There are many risks associated with investing period.
You can lose significant amounts of money in any investment, and no investment is foolproof, or guaranteed to make money.
The picks I make are no different.
In fact, the money that you allocate to my picks should be for the riskiest portion of your portfolio or assets.
Small cap and especially micro cap stocks, are the absolute riskiest investments you’ll ever own in the stock market.
In addition to this, because my portfolio will be so concentrated and only contain a maximum of 10-15 stocks at any one time, you can expect that the volatility of any one of the companies in my portfolio will have a disproportionate affect on the overall returns of the portfolio.
Depending on your age, risk tolerance, and income saved and earned, the amount you should invest in the stocks recommended on my website could range anywhere from 5-50% of the total money you have to invest.
In addition, the buy and sell advice that I give on PeakStocks.com is based upon my own personal research, experience and intuition.
As such, please note that you should consult with your own professional investment advisor and/or do your own due diligence on all the companies recommended by me before making any investment decisions.
Full Disclosure: I own, or intend to own, shares in every company that I recommend on this site.
All the picks on my site are designed to be BOUGHT and HELD for long periods of time, anywhere from 6 months to 5 years or longer.
Why?
Simple: Market timing is a fool’s game.
Especially when it comes to small companies with small trading volumes, little analyst coverage and a niche market.
In addition, the best time to enter a stock, or put more money to work in the market, is not when things are going good, but when they look the worst!
There is countless data showing that most investors BUY HIGH AND SELL LOW instead of the other way around.
We tend to panic when things are not going well, and sell all of our stocks, and buy into the market when things are hot, and going good, thus getting in at the TOP and significantly underperforming the market as a result.
The only way to consistently beat the market, and in fact CRUSH the market, is to always be putting capital to work.
When times are good, you nibble at stocks that appear beaten down or cheap.
When times are bad, you dive in, buying shares in companies that have been punished unnecessarily just because they are being taken down with the rest of the market.
There’s an old saying that Warren Buffett uses to describe this:
“I will tell you how to become rich…Be fearful when others are greedy. Be greedy when others are fearful.”
There will be NO FEAR in my picks. Emotion will be taken completely out of the equation.
As a result of that, it can take YEARS for some of these companies to realize their true potential, and be “discovered” by the rest of the investing community.
Don’t worry, that’s a VERY GOOD thing for us!
Because once these companies prove themselves and skeptical and more risk-averse investors start feeling more comfortable buying into them, we’ll already be in, and that’s where our gains will far outweigh the market!
If your timeframe for making money is shorter than a few years, then this is probably NOT the right service for you.
So how many of us out there wake up each morning and check our investments’ performance?
Probably most of us.
What happens to your psyche on days when your portfolio or investments are significantly down?
Do you panic? Get discouraged? Get angry?
One the flip side, what do you feel when your investments are up significantly in one day, week or month?
Do you have a little extra bounce in your step? Do you see the day differently?
What I am trying to get at is that basically, emotion serves no purpose in investing.
Either up or down.
Volatility is the name of the game in any market, especially with the types of stocks I will be picking, so if your regular emotional outlook is closely tied to your investment’s gains, this is probably not the right service for you.
Remember, the market does not go up in a straight line!
Over time, most stocks do rise, some more than others, but the dips and twists and turns that they take in getting there are sometimes too much to take for some investors.
If you are looking for safe stocks and low-risk investments, then you are better served investing in mutual funds, Bonds, CD’s or large-cap stocks.
But on the flip side, your returns probably won’t ever be higher than the overall market.
Just be aware that volatility is a natural part of investing, and actually a VERY GOOD thing because it allows us to get stocks on the cheap when others have sold them for no good reason other than panic.
If you are patient, then you’ll be fine with the stocks that I pick, if you are not, then this is probably NOT the right service for you.
V. How We Will Mitigate Risk:
I will try my best to mitigate the risks of volatility and capital losses within the stocks I pick, our portfolio and the overall market through the following means:
One of the best ways to lessen your exposure to losses is to diversify your holdings with a broad mix of stocks.
When some are down, others are up, and thus you even out your gains and losses over time.
However, wide diversification also saps some of our potential gains!
While I will look to diversify the portfolio somewhat, don’t think that it is a well diversified and balanced portfolio, because it will not be.
When all is said and done, I look to hold about 10 - 15 companies at any one time from all different types of businesses, industries and sizes.
This will somewhat add another layer of protection to our portfolio if the market, or any one stock in our portfolio, declines precipitously, but because of the concentrated nature of the portfolio, we will still be subject to high price swings by any one name, for better or worse.
Because of the uncertainty of the market, and specific stocks in general, it’s always a good idea to “cost-average” your purchase of shares in a particular company.
By having you buy in 3rds and 4ths (basically not putting all your money into any stock all at once that you had allocated for it), you can protect yourself from a stock that is in decline, but that is also a good candidate for a turnaround.
Here’s an example:
Let’s say for instance you have $2,000 to invest in one stock.
Once I put out my buy recommendations, I will tell you how much to buy.
This can range from a full position (very rarely), to perhaps 1/4 or less, and anything in between.
So if I said to purchase 1/4 position of stock ABCD, that would mean you would buy $500 worth (1/4 of $2,000) of that stock right now.
If the stock rises and never looks back, great, we at least got in and we can watch our money grow.
On the flip side, if the stock declines further, that’s great too, because it means we ca buy MORE shares at a LOWER price, and AVERAGE our cost basis!
Below is an example of how this would affect our purchase price:
| Date Purchased (Stock: ABCD): | Position Buy Amount: | Amount Spent: | Number of Shares Purchased: | Price Per Share: |
|---|---|---|---|---|
| 2-4-06 | 1/4 | $500 | 25 | $20 |
| 5-7-06 | 1/4 | $500 | 40 | $12.50 |
| Totals: | 1/2 in ABCD | $1000 | 65 | $15.39 |
So, in the example above, If we buy $500 worth of ABCD at $20 per share and it declines to $12.50 per share, and we then buy another $500 worth, our AVERAGE cost is actually $15.39 per share, so our break even point fell from $20 per share, to $15.39.Notice that the break-even point is LESS than the median point between the first buy and the second buy ($16.25).
Why?
Simple: we now have MORE shares at a lower price point, so it brought our average cost lower than if we had bought the same number of shares at both price points.
This is the power of cost averaging and putting equal amounts of capital to work if a stock declines!
We just bought more stock on the cheap, which in the long run, will allow our gains to far outpace the overall market’s returns!
This is a great way to slowly build your position in risky stocks over time and get some really good bargains as others are panicking and selling.
When I recommend a stock on this site I want you to buy and hold it for long periods of time.
You must remain patient, and never try and time the market.
Market timing is a fool’s game and no one can know what’s going to happen tomorrow, next week or next month.
The following excerpt taken from an article on The Motley Fool illustrates the market timing issue:
“Statistically speaking, investors’ returns suffer when they stash assets on the sidelines.
Consider that 95% of the market’s gains between 1963 and 1994 occurred during 1.2% of the trading days.
An investor who was out of the market for the best 50 days of that 31-year period would have realized roughly the same annual returns as someone who put all his money in risk-free Treasury bills.
Since the market tends to go up two out of every three days, market observers have a better chance of missing out on a big gain than avoiding a large loss.”
Never is this more true than with micro-cap and small-cap stocks.
Because they are largely underfollowed by Wall Street, it doesn’t take much to make them move up.
It could be a news story, it could be that an analyst initiated coverage on them, or the company came out with a new product or other press release.
The problem with these “events” is that you cannot and will not ever know when they are going to happen (if you did that would be insider information, and people go to jail for that!).
That’s why you do your research and homework on a stock, buy it in 3rds or 4ths, and then sit and wait patiently.
Good things will come, and when they do, it’s usually very quickly after lots of time spent waiting with nothing happening.
The biggest reason that I started this website was because I am passionate about researching and investing in small cap and micro cap stocks
I know, it sounds pretty boring to most people, but this love of research is what gives us as “average” investors, another edge over Wall Street and other investors.
You see, while most people buy stocks that they know: Proctor and Gamble, Coke, Apple, Nokia, Ebay, etc., we will be buying mostly stocks that NO ONE has ever heard of!
Believe me, this is a huge advantage for us as previously explained.
This is also where research is our friend.
All the companies that I recommend on PeakStocks.com have been HEAVILY researched and poked and prodded by me.
Every aspect of the company has been broken down, as well as their future prospects.
This includes things like talking to management, digging around the company filings, calling competitors and customers and listening to analyst conference calls.
With smaller companies you have to dig a little deeper than other stocks that are more widely known because larger stocks that everyone knows about are usually priced and trade in narrow ranges because most people “know” what they are worth.
So, by doing my homework and always watching for warning signs within the companies that I follow, we have a big edge over others that don’t even follow these companies, and over time, that research plays out into large gains.
This research also allows us to pull out of positions that are looking shaky, or for which the original reason for purchasing them, or investing thesis, has deteriorated or changed.
By doing intensive research and follow-up on all the companies that I recommend, I add another layer of protection for our portfolio.
Aside from all the obvious “technical” stuff, like cost-averaging, doing research, etc., this is probably the #1 problem most investors have, and it is more than likely the most important one to have under control.
Emotions are powerful things and can inspire and lead us to many great actions.
However, emotions can also cause us to make irrational decisions.
This is one of the most important aspects of your life where emotion should have NO role in your decision-making.
That being said, part of my investing philosophy is never allowing emotions to influence my investing decisions, whether I am right or wrong.
That’s exactly what you’ll get from my recommendations on PeakStocks.com.
Not only is this important for picking stocks for the right reasons, but it is also equally important when one or many of our stocks are declining and I decide to purchase MORE of them.
Remember the quote from Warren Buffett above? I’ll repeat it here:
“I will tell you how to become rich…Be fearful when others are greedy. Be greedy when others are fearful.”
Simple, yet true.
The best time to buy great companies is when they are declining for no reason.
The best time to sell stocks is when they have risen irrationally above our risk/reward tolerance.
Throughout the process, staying calm, collected, and in control of our emotions will be another factor for lessening our risk.
The final piece of the puzzle for lessening your overall risk to the investments recommended on PeakStocks.com will be the risk ratings that I provide for each stock that I recommend.
The rating system is simple:
- 1 Little or no risk
- 10 The highest possible risk
On every pick, I’ll try and assess that particular stock’s potential to decline significantly and explain why I have given it the risk rating that it has.
While never guaranteed, this rating should help you gauge whether this particular investment is suitable for your portfolio, while also taking into consideration my investment thesis behind that stock.
Of course, please remember that if you include in your portfolio only Risk Rating stocks that have a value of 1, more than likely, your returns over time, will probably underperform the overall PeakStocks.com portfolio, but I wanted to give each individual the most information possible so that you can decide for yourself what is right for you.
VI. In Conclusion:
Using all the above criteria is what will prove to be the difference in the stocks that I pick vs. the traditional Mutual Fund or Market Fund.
Although I cannot of course guarantee any rate of return, or that you will make money, I believe that my methodologies and diligence will give us far and away better returns than the overall market.
I will be picking solid micro-cap and small-cap companies with high growth prospects and a bright future, but as with any investment, unforeseen circumstances can take place that negate my research and we lose money on that pick or the portfolio in general.
In addition, because of the volatility within the overall market, large fluctuations are not only possible, but also probable not only within each stock, but also within the overall portfolio.
If you can’t stomach a short-term loss of up to 50% in any one stock for the chance of beating the market over the long term, then you probably shouldn’t own any of my recommendations.
If however you have a long term outlook, say 3-5 years or more, and want the best possible returns, research has shown that investing in small, high quality companies before they grow big, will yield you the highest returns on your money of any investment class, and that’s what I will aim for here on PeakStocks.com.
Are you ready to join me and take control of your investing future?
