Its Over, page-781

As a subscriber to a number of smallcap newsletters, I found it rather interesting some of the picks that have been made. Some have done exceptionally well but many have not made the mark or can we say have dropped rather significantly. While I subscribe for investment ideas, it is still important to review if they are worthy investments that can provide a good risk reward outcome. These newsletters may well have a 3 year horizon but what use is 3 years if the Big Kahuna lands in the next year. Naturally the assumption is that there will be no black swan events and they give themselves ample time so if they get it wrong, they have time to recover.

This seems to perpetuate a Hold mentality when all signs are pointing that the recommended stock is no longer performing for numerous reasons. One good reason for cutting loss quickly is when you have identified a gap in management credibility. We have witnessed this in Buddy Platform (BUD) and we saw that in Nuheara’s NHS announcement debacle yesterday. Determining the best time to do so (cut loss) is always a case of art or perhaps luck.

Equity Story (ES) had been promoting BUD to its members since when it at its peak of 30-40c and continues to believe the story after it has lost 80% of its value and after misleading forecasts made by the company tainted its credibility, but we know that they likely hold a significant investment in the stock themselves. Another , Exponential Stock Investor made a bold call to buy Blue Sky Alternative (BLA) at $3 in May last year even after the AFR had raised questionable investment conduct by the group- and it is now trading at just 49c , one of the ‘falling knives’ stocks I have been cautioning on. Another, Wealth Eruption sought to raise profile of 99 Wuxian (NNW) as a China growth play at 15c when AFR had also earlier brought up dubious transactions of numerous Chinese controlled ASX stocks (including NNW) – now languishing around 8.5c. Then of course we have Small Cap Alpha that recommended Get Swift (GSW) around the time of their Amazon hype and continued to hang on until its ‘dying’ days.

The above examples do not fully reflect their overall performance as they have also made good calls, but there is one thing they all do not do with regards to their poor performing recommendations- tell you earlier when to sell and ‘cut loss’ – because that would badly reflect on them (they don’t want you to lose money on their watch) and worse still if the stock goes higher after telling you to cut loss. But they will tell you to sell after a large gain- that obviously is the easier thing to do.

However, I believe otherwise. With regards to small caps, you need to be realistic to expect that some that looked potential turns out to be lemons. Remember that with small caps, you are largely banking on information that in most cases, their management will unlikely be transparent to tell you that their businesses are not in great shape, rather resorting to word spins for you to read between the lines. So typically, you have a large fall then soon followed by cascading falls in a ‘falling knife’ chart pattern with intervening periods of short term spikes following a ‘positive’ announcement. Hence, if you continue to believe your newsletters that either have vested interests not to call a Sell when it should have been so a lot sooner or afraid to do so to avoid losing credibility, you would end holding it to the end- and hope the outcome is more positive as the days progress. Did GSW get better as the days progress?

In small or micro caps, IMO the challenge is to win big on perhaps 2-3 stocks out 10 and minimise your losses (including cutting losses) on the 7-8 that won’t do well, and at the end of it, it is the composite return of the portfolio of those stocks that matter. Interestingly, it is rather common for us to boast of a stock that we made 80-100% return but perhaps not those we have lost 80-90% because we ‘ditched’ the latter to the bottom drawer and didn’t want to do anything about it and left the ‘cancer’ to grow.