My idea generation process: How I find overlooked microcaps
A detailed overview of the tools I use
I believe that idea generation is the most important factor in microcap investing. There are several different skills an investor needs, but being good at idea generation has the highest correlation with generating alpha in my opinion. I would rather be average at analyzing a business, but excellent at generating ideas. In the end, it comes down to the principle that choosing the right game trumps how you play the game; it is more important which boat you are in than how hard you row.
The same principle applies here. Obviously, there are several ways to play the market. Some are contrarian investors, others are momentum investors. In my personal experience, it is easier to look at things that no one else is looking at than it is to have a different opinion on the things that everyone is looking at. That is the main principle of microcap investing. On the topic of how the discovery process works, I recommend this video by Paul Andreola:
In this article, I want to focus not on the why, but on the very practical how. In my 2023 review, I mentioned that I wanted to put more emphasis on my idea generation process. So far, this has worked well and I feel that my setup is 100x better than it was in 2023. I honestly believe that if you are serious about beating the market, you cannot play this game with half measures. Even if you have already chosen the "easiest" game. So before I go into details, let me tell you two things. You need to spend a lot of time turning over rocks. Speed matters, microcaps are highly volatile, you need to be able to react quickly to (relevant) news. This process is built around those two principles.
1. Look at as many companies as possible
The first peace of the puzzle is the one where I still don't have a strict process and don't want to have one. I like to let my curiosity and randomness lead me. The goal is to look at as many companies as possible. That can be overwhelming, so I've limited myself. I usually only look at companies with a market capitalization of below $100 million that are listed in the US or Canada. Sometimes there are exceptional opportunities in the UK or above $100 million, but I spend 90% of my research within those parameters. To get in front of as many ideas as possible, I use the following tools:
Read the latest posts in MicroCapClub or browse MicroCapClub
Reading ValueInvestorsClub (VIC) write-ups or browse around VIC
Browse around twitter
Going A-Z on otcmarkets.com (usually I look at stocks between $0.1-$3.)
Newsletters such as ToffCap or MS Cliff Notes
Reading press releases on Sedar.com
Reading 13D filings
I have no strict process but check all these sources regularly. Once I find an interesting situation, the interesting part begins.
2. Keeping track of the companies
If you look at a lot of companies, 80% of them are not interesting at all and 18% of them could become interesting if the situation changes and at best 2% are interesting now. When I come across a company that could potentially become interesting, I put it in my feeder app to get an instant notification when it files something with the SEC.
This allows me to follow the company and re-evaluate the thesis as the situation evolves. It also gives me the ability to react quickly to a situation because I am already familiar with the company and can understand the news quickly. Not every stock files with the SEC, however, so I keep another "idea tracker" list (an idea I got from Dave Waters) where I put every stock that I find interesting. This list is frequently reviewed by me. I started this list in 2022 and now 2 years later I have made two investments from this list. Today, I like to sort this list by stocks that are trading close to their 52-week-high. Since I am looking for change, the stocks are usually trading close to their 52-week-high.
3. Make Decisions
Some companies still look interesting enough that I dig deeper, for which I use Journalytic. This looks like this. I add the stock to the journal, including the source and status (which is still "in research" at this point).
Usually I run a “pre-buy-checklist” - write maybe one or two questions or To-dos for my research and within a couple of days make a decision. Either I buy, pass, or say I will buy at a lower price or if a certain event happens. From there, the process starts all over again.
Of course there are more ways to come up with new ideas, but I wanted to give an overview of my current process. Which I am very happy with and think has served me quite well. If you liked this article, please consider liking or sharing it with your friends.
Until then,
Sebastian
Summary of Tools/ helpful websites:
Thanks for taking the time to share this. Why do you prefere to restrict yourself to US and Canada?
Ausgezeichnet!
A question how do you follow prices, where do you get price alerts? Yahoo has a nice feature for price alerts but when the price gets there, the price alert is deleted.