Saturday, September 23, 2000
The Sophisticated Investor
So you want to play with microcaps?
By John Waggoner
USA Today
Come here. I want to talk to you. You've been trading micro-cap stocks again, haven't you? I just knew it.
How could I tell? I looked in your portfolio, that's how. Look at this stock! Twenty-five cents a share! Look, if you're going to fool around with microcaps, take the time to do your homework. And if you can't do that, just buy a microcap fund.
So who told you to buy that stock? Oh, one of your Internet chat-room buddies. Who was it? GnarlyNasdaq? TraderGrrrrrl? Ponzi4U? Those chat room people are not the sort of people I want you hanging around with. You can't trust them.
Look at this story about the 15-year-old boy trading stocks from his computer. The Securities and Exchange Commission says he was talking up stocks in chat rooms. Of course, he'd buy a boat load of the stock first. Then, the SEC says, he'd wait for them to soar. It's the oldest trick in the book.
The SEC says he made almost $273,000 while his parents weren't looking. Yes, he's a very smart boy. But now look what happened. He has to give all that money back, plus $12,000 in interest. No, he didn't admit or deny guilt. So why are you buying stocks on tips from strangers on the Internet? That's crazy.
You don't believe me? Here, wait a second. Listen to Chuck Royce, manager of the Royce Low-Priced Stock Fund. He's been trading microcaps longer than you've been alive. Yes, and he's very good at it, too. His fund is up 28.9 percent this year. You know what he says about chat rooms? “A chat room is a cocktail conversation, subject to the drunkenness that goes on with the sharing of casual thoughts.”
Well, that's exactly right. You think you're going to find the next Microsoft from some guy who calls himself ChartBuzzard? No. So don't believe what you read on the Internet about micro-cap stocks.
No, I'm not saying you should never buy small stocks. Back in 1977, Roger Ibbotson, a professor, created a study showing that small-company stocks outperformed large-company stocks over the long term. But his study didn't look at the small-company stocks that most small-company funds buy.
He looked at stocks of companies whose market capitalization — share price times shares outstanding — was an average $89 million. That's tiny. The median stock in small-company stock funds has a market cap of $930 million. Micro-cap funds invest in the type of stocks most comparable with those that Mr. Ibbottson studied.
So his study indicates that microcaps can be your friend. But like Mr. Dynamite, we have to be very careful with them. Let me give you three pointers:
• Let the itty-bitty ones go. Forget these little firecrackers that aren't listed on any stock exchange. They're called pink-sheet stocks, because their prices used to be listed on pink pieces of paper.
Mr. Royce says the stock exchanges, such as the Nasdaq, give you some measure of comfort, and he's right. Exchange-traded stocks can be manipulated, but the exchanges are more closely monitored than those silly pink-sheet stocks.
• Watch for spikes. I don't want to see you chasing low-priced stocks when they have a spike up in volume. That's one sign they're being manipulated.
That's what Warren Isabelle says, and he's the manager of ICM/Isabelle Small Cap fund (800-472-6114), and he should know. His fund is up 17.4 percent this year.
“I see it happen all the time,” he said. “If you see a trading pattern that looks like it's been disrupted, that's cause to be suspicious.”
• Do your homework. Look at me when I'm talking to you! Read the annual report. Figure out what the company does. Don't think that someone else will do all the work and hand it to you.
Now, if you're smart, you'll just buy a microcap fund.
The five best ones the past three years:
• Bjurman:Micro-Cap Growth (800-227-7264), 58.1 percent return this year, 162 percent last three years.
• Jundt US Emrg Growth:A (800-370-0612), 5.6 percent this year, 117 percent last three years.
• RS Inv: Micro Gr (800-766-3683), 28 percent this year, 89 percent last three years.
• Royce FD: Low-Prcd; Inv (800-221-4268), 28.9 percent this year, 71 percent last three years.
• Tocqueville:Sm Cap (800-697-3863), 17.6 percent this year, 52 percent last three years.
Now finish up your trading. Sesame Street starts in five minutes.
Banks try to boost sickly euro
Second electric facility studied
'Cosmeceutical' concept is latest skin-ovation
Blue chips recover amid high-tech sell-off
Cooper Tire may be probed
HIGGINS: Personal finance Credit card offers push envelope
Home State case near conclusion
Intel's plans shaken
Savvy strategies
Still hurting from P&G's stock fall?
The Sophisticated Investor
Tobacco group offers surplus to avoid cuts
Tristate Business Summary
What's the Buzz?
