Short Term Trading Week Starting: 21 May, page-99

RISKS IN TECH MICROCAPS

The catastrophe that is BIG UN is a timely reminder of the tremendous risks in investing in small caps

There are 4 keys stages to tech listings - each presents serious risks:

1) Concept stage - very early listings are basically nothing more than a powerpoint slide and a few CV's - the ASX allows some ridiculously premature companies to list - the vast majority of these have no chance of getting anywhere - and therefore should be traded like 'molten hot potatoes'

2) Prototype stage - a number of companies are trying to get their prototypes to actually work - A3D is an example - often these machines are trying to create something new - and therefore are exceedingly challenged - how much cash needs to be raised to finance the process? how long will it take? do they know what they are doing? - these stocks needs to be treated as long shots

3) Pilot stage - getting clients to trial - FGO is an example - trials maybe paid or unpaid - but either way this can be a long bureaucratic saga - clients can move the goalposts - timelines can blow out - whenever a tiny company is depending on a massive company the games is never easy - these stocks should be traded in and out constantly

4) Commercialisation stage - getting material revenues - this is where you would like to think a certain level of certainty can be expected - but as BIG UN and 1PG proved - there can still be nasty surprises - companies can seemingly 'cook' their books for quite a while before they get found out - so always check and recheck your assumptions

Moral - always maintain a healthy dose of cynicism when trading microcaps