Guide to Microcap Stock Analysis – Step 0: Rules of the Road

Welcome along to the journey of learning how to analyze a microcap company! This step, a very important one, will be a listing of some key ground rules for the entire process. Many of these are my personal opinion and things I’ve picked up over the years that I’ve learned to follow. These aren’t hard and fast rules, but they’ve saved me from being burned in the past. So, I highly recommend you follow them.

Let’s get to it!

Ground Rule 1 – Don’t Get Emotional

This is an easy one to say, but extremely tough to follow. You’re going to see companies you love the idea of, but something else is screaming at you “do not invest!!!” Say you think a product is going to cure cancer, hangovers, and stubbed toes. All in one nice pill! But the management of the company have been convicted of securities fraud 17 times and the company is going to go bankrupt in 48 hours… What do you do?

You don’t fall in love with the company! Stick to your objective analysis and remember to take a deep breath at any point you think a company is too amazing. That’s why I built in the reflection points into the method!

Ground Rule 2 – Don’t Unnecessarily Hold

After you invest in a company and it turns out to be a complete dud, you can never fault yourself for cutting your losses and investing. Just because you thought it was great six months ago doesn’t mean it’s great today still. You’re going to win some, you’re going to lose some, so don’t hang onto your losers for too long.

Conversely, while this is a long-term investing method of investing, don’t hold onto your winners longer than you should. In the OTCs, you can many times see some bizarre prices for a company that don’t last. If you know a price is stupidly high for a company and won’t last, there is never, ever, anything wrong with taking profits. Period. End of story.

Ground Rule 3 – Identify Ulterior Motives

As in all things, if you’re relying on a third party for analysis on any stock, you need to take everything they say with a grain of salt. I’m not saying don’t listen to anybody but yourself about a company but think about what’s actually being said.

The OTC is completely inundated with unsavory characters. Many people are holding a stock that is a complete dud, but they’ll pump it just to try and get their money back. Conversely, it’s well documented that there are very targeted short and distort campaigns on the OTC.

So, just remember, every time you are reading third party research, including my own, INDEPENDENTLY VERIFY!

Ground Rule 4 – Don’t Blindly Trust Management

This is similar to the one above, but in the OTC you are going to hear company management make lofty promise all of the time. This could be acquisitions, revenue forecasts, the second coming of Christ… you name it, an OTC CEO has probably promised it.

If management says something is going to happen, as a baseline just assume there’s a 50% chance that it won’t happen. Or, conversely with management guidance, just divide everything by two! 10m in revenue next month, let’s assume 5m, and so on. Profitability in two years? Let’s make it four years for our models.

Ground Rule 5 – Everything is your Fault

This is more of a general life lesson, but I’m going to say it anyways. When investing in the pennies, you’re going to win, you’re going to lose, but you always have to take responsibility for everything that happens…good or bad.

If you buy into a stock that plummets 50% the next week, you can start blaming the economy, the president, your mom, whoever! At the end of the day, you took the risk, you reap the upside or downside. The sooner you take responsibility for your own trading and investing, the more you will begin to learn. If you never take responsibility for anything in your life, you’re going to stagnate as an investor and as a person.

Sam’s self-help book over!


I’ll continue to add to these ground rules as time goes on, but you need to keep these in mind as we move through the process. These are applicable in basically every step of my method.

Now… onto the next step!

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