Why I invest in illiquid micro-caps in one graph

Someone on twitter linked to a presentation of Montanaro Asset Management. The company invests in small caps in Europe and seems to have a pretty solid track record. I find it always interesting to read what other investors are doing, but sometimes what they are not doing is equally interesting. What Montanaro isn’t doing is investing in (small) micro-caps:

Montanaro presentationThis is of course not anything new, but just a nice illustration of how the smallest stocks attract little interest from professional investors. If they think small caps are already under-researched it’s clear that nano/micro-caps are even less efficiently priced. That’s exactly the corner of the market were I’m trying to find my idea’s, and I think that should make sense for most serious individual investors. The market doesn’t pay you based on how smart the guy at the other side of the trade is, so no point in making investing harder than it needs to be.

Individual investors usually don’t have a huge amount of money that needs to be put to work so if the average trading volume per day is a couple of thousand dollars worth of shares it should be possible to build a position without any problems. With some patience you can buy even less liquid stocks. Something that is truly uninvestable is pretty rare.

What’s of course important when you buy illiquid stocks is that you know that you won’t be forced to exit your position at an inopportune time. The professional portfolio manager often has to worry about clients that want to withdraw at exactly the wrong time, making investments in illiquid stocks less desirable. I don’t think you should be invested in the stock market if you don’t have a long time horizon, so when you invest in something you might just as well capture a liquidity discount. No reason to pay for something you don’t need!

Disclosure

Long a lot of small and illiquid stocks

6 thoughts on “Why I invest in illiquid micro-caps in one graph

    1. Alpha Vulture Post author

      Good point, and that certainly is true to some extent. At the same time, there is no discount on dividends so you get a higher yield. The company might grow and/or become more liquid, or there might be a liquidity event such as a liquidation, merger or going private transaction were this discount isn’t relevant. Although a buyer might still use it as an argument to pay a lower price.

      Reply
  1. Subu

    Thanks for sharing your ideas

    1. Do you have or do you disclose is list of such stocks ?

    2. Are these listed on normal exchanges or pink sheets ?

    3. What about disclosures and accounting / reporting information ? Is that available ?

    Regards
    Subu

    Reply
    1. Alpha Vulture Post author

      Some are listed on normal exchanges, while some are traded on the pink sheets (for US stocks anyway). Similarly some deliver the same amount of disclosure as ‘normal’ stocks while others provide barely any information. It depends!

      Reply
  2. Zimbo

    Thanks. I like micro-caps too and they form majority of my portfolio. It is nice to see it visualized.

    I didn’t realize the large number of micro-caps. We have so much to choose from compared to big boys.

    Reply

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