Value Investing

The MicroCap Mindset – Focus On Downside, Not Upside

This article was republished from a post on the Invest Before the Street blog

All I want to know is where I’m going to die, so I’ll never go there…

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

-Charlie Munger

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The microcap space often gets a bad rap for sketchy companies, promotional management teams, and just higher risk in general.

Most of the time, it’s rightfully deserved. There’s a lot of risk in the space if you don’t do the proper level of due diligence.

But there’s also plenty of hidden gems with tremendous value in the microcap space. More than you’ll find in any other asset class.

Want to make better decisions when it comes to investing?

Focus on the downside, not the upside. Focus on reducing mistakes, not what could go right.

Some of the greatest investors became great investors because they developed a mindset of reducing mistakes, not trying to pick ideas with the most upside.

Ben Graham, often noted as the founder of value investing and mentor of the great Warren Buffett, popularized this through his concept, “The Margin of Safety”, which he talked about in his excellent book, The Intelligent Investor (for those who haven’t read it yet, I’d highly recommend grabbing a copy here.

It’s a simple concept: buy companies that have a large margin of safety, meaning that even if some things go wrong with the investment, the investment could still work out.

When you’re investing in the microcap space, people will probably pitch you on companies that sound really sexy, with tons of potential growth, massive upside, revolutionary CEOs, etc. Whatever it is, always have your BS radar on. Start asking yourself smart questions:

How simple is the investment thesis?

Are there too many things that can go wrong?

Do I even understand what the company does?

Is this company even close to profitability?

Am I being ‘sold’ on the idea?

Especially if you’re new to the microcap space, keep your investments simple, easy to understand, and in your circle of competence.