Short Term Trading (Australia Day) Weekend Lounge: 25-28 Jan, page-124

Great contributions so far– extremely informative for newbies (and non-newbies) into navigating the fine art of losing money (and occasionally making it). Thanks for all the Aussie hits too. Good way to while away the morning before the cricket one-dayer.

I am not a trader by any stretch of the imagination. I am a small-cap investor, that gets set early (and cheaply), co-invests with a cohort of investors I trust, and usually play with a multi-year horizon (or target price) on my positions. This has worked for me and this approach has taught me a thing or two so I wanted to add a few items to the ledger.

1. Learn how to read an announcement. Announcements are not ‘the truth’. They are a combination of marketing, spin and useful information. Consider that under the framework of continuous disclosure announcements are the lifeblood of small caps. Be wary of over-announcers and the exuberance of the HC community after each announcement.

Take your time, read an announcement two or three times, and try to see what they are really saying (and in many cases what they are not saying). Many have mentioned they have been misled by management. Often, the signals are throughout the announcements, it’s just that people hear what they want to hear, and then join a number of dots that aren’t there. I’ve seen this a lot with many companies recently (IAM, XPE, NOR, GSW to name a few).

2. Realise that most of the small cap companies are mediocre. If you play at the bottom end not all companies are the same – you really need the combination of good business, good value proposition, viable market, sound revenues, solid team, tangible growth plan to have a legitimate chance to get to a $300m MC and stay there (and hopefully appreciate further). Also, by being honest on the quality of a company may give you more insight into when to sell. You know the rise won’t last but you don’t want to be holding the can when it goes into a 2 year trading halt.

3. Information asymmetry. The people that make the real money are those that have an information advantage over other traders/investors. I’m not talking about insider trading but more about understanding a market, a roadmap, potential news-flow, what has historically happened when a specific broker gets attached to a company. If you can analyse a quarterly you are already ahead of 80% of the other punters. If you can read a quarterly and an announcement properly it is clear as day when a company is greasing the market for a cap raise. Many traders just trade on hope, you can win by just being aware and spotting opportunities that become clear.

Anyway, stay safe out there – and every dollar made or lost should teach you something so you are a better investor next time. It has for me.