Harvesting & Revenue, page-168

Here is a summary of warning signs when it comes to investing in microcaps. Bad information is the only one relevant to CLI, and as far as it does relate, I view it as an acceptable risk.

Warning signs

The microcap sector is full of under-performing companies, so it is important to understand warning signs when you see them. These may include:

* Price: People often believe a stock is cheap just because it is trading at a low price. But the share price alone never reflects real value. It may be low because there are literally billions of shares on offer. Without any earnings per share or price/earnings ratio relative to its peers it could still be grossly overvalued. Look at the company's recent trading history – if it's been in a downward trend then buying in because you think it's due for a turnaround may be like trying to catch a falling knife.

* Lack of income: Companies that generate little or no income and are constantly reliant on the largesse of their shareholders to move their agenda forward should be avoided like the plague. Glennon says it is hard to assess the quality of businesses that produce no cash flow. "Many of these companies have a terrible track record of creating returns for investors," he says, adding that the most notorious of these are small resources and biotech companies.

* Lack of information: As microcaps are often newer companies, good information can be notoriously hard to find. Start by doing a Google search and see what comes up. If there's no media or analyst coverage at all and the only things that pop up are compulsory ASX announcements and a shambolic website that looks like it was cobbled together before the word internet entered the vernacular, that's a bad sign.

* Bad information: Social media can be a valuable knowledge source. It is also rife with people pumping companies through forums, blogs, and Twitter, so you should always be wary of those claiming a particular share is about to mirror Sirius Resources and jump from 5¢ to $5 in the space of weeks.

* Lack of liquidity: This is a double-edged sword. If the share price is on an upward trend there may be a dearth of available shares. However, if it is in a downward spiral it may be impossible to offload. That means you may be stuck with a million shares in a biotech trading at 1.3¢ for a lot longer than you bargained for.