“If you are going through hell, keep going.”
Winston Churchill
Sage words of wisdom that I find comfort in when my micro cap positions are consistently down in double digit percentages. Words from a great leader, intended for far more desperate times, when the stakes were much higher. Only he didn’t actually say them [1].
For some of these positions I have chased the red dragon down a deep rabbit hole, and because of such doubling down on these companies I am now overweight. But, in addition to those extra kilos courtesy of a stress-induced binge on hamburgers and craft beer, my portfolio is now also disproportionately represented in this high-risk sector. Perhaps, instead of justifying my foolhardiness with platitudes extolling the virtues and wisdom of ‘averaging down’ I should have heeded the words:
“You can’t reason with a tiger when your head is in its mouth!”
Only, whilst they are script-writing at its best, those words aren’t Churchill’s either [2]. These words ring true because we know the story of Churchill. The gist. Maybe it doesn’t matter too much that he didn’t say those precise things.
Investing at the lower end of the ASX can be a bit like this. Perhaps one of the greatest attractions to this type of investing for the less mathematically gifted is the focus on the stories. The numbers at this end of town are scarcer on the ground, the full information just not there yet, and the future far less predictable. The accurate analysis of these companies proves a challenge to value investors who adhere strictly to the Benjamin Graham school of thought. Investing in this space is also more exciting…and dangerous. Investing in a large cap retailer of groceries or a distributor of dairy products is unlikely to keep you up at night, but it is equally unlikely that such a company will triple its sales revenue or broker a deal with a giant of the software, e-commerce or pharmaceutical industries.
In the absence of precise quantitative measurements and mainstream professional (and – to the extent it exists anywhere – impartial) analyst coverage qualitative criteria comes into play. Little things, like whether a company’s investor marketing material or presentations share the grammar of a deposed Nigerian Prince’s love letters, become important. Alternatively, a presentation may make a company look like it can produce a pretty slick product at great volume but a cursory internet search of the company’s registered address returns photos of a granny flat in suburbia.
However, for both qualitative and quantitative analysis the ‘actual’ truth is of course always more important than just a good story or ‘alternative facts’ (to borrow the phrase used by the administration of a far less inspiring or oratorically gifted leader). ASX announcements fly thick and fast in the coming weeks to fill the information gaps in the micro cap field. And – barring the boldest of frauds – these missives generally bear much closer resemblances to truth, written in that most fundamental of mediums: numbers.
Whether facing good or bad news you can take additional comfort in both the content of this quotation and – if you are a historical pedant – in the knowledge that it is correctly ascribed to Winston Churchill:
“United wishes and good will cannot overcome brute facts…Truth is incontrovertible. Panic may resent it. Ignorance may deride it. Malice may distort it. But there it is.”
And, for those of us hovering over the sell button because a sudden self-doubt has usurped those previously well-researched and soundly based convictions:
“Sometimes when Fortune scowls most spitefully, she is preparing her most dazzling gifts.”
So good luck to my fellow Strawmen (and women) in the micro cap jungle over the coming reporting period, and I’ll leave you with these timeless words of the 16th President of the United States of America:
(Article first published on Strawman Forum 27/06/2018)
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