How to Profitably Invest In Small Cap Stocks
Part 3: Patience

Smallcaps.us - How to Profitably Invest In Small Cap StocksWhen investing, patience will not only make you a better and more successful investor, it will also give you peace of mind for years to come. Without patience, you may be reduced to staring at your stock’s ticker symbol all day on Yahoo Finance, emotionally reacting to every movement up or down. This kind of lifestyle is untenable and patience is what can help you hold on to your sanity.

You’ve probably heard the saying, Good things come to those who wait. Well this is especially true in terms of investing. If you try to time the market with your transactions or sell just because a stock is no longer moving, then you could miss out on future growth.

Buying Too Soon – The Unexpected Problem

The price you pay for a stock directly affects how much profit you will eventually make.

When you’ve found a great little company with good potential, it’s wise to set a limit order close to the stock’s recent low price. It sometimes takes a lot of discipline and patience to ignore that money burning a hole in your pocket, but it pays in the long run.

An example. TurboSonic Technologies (TSTA) is currently trading at $0.43. When you look up its Historic Prices on Yahoo Finance (see image below) you’ll notice that the stock regularly dips to around 35 cents. This is the price at which I’d set my limit order. That way, when the stock moves back up to $0.43 instead of just breaking even, you’re already 22 percent ahead.

It takes patience, but buying your stock at the right price is a critical factor in maximizing your profits. My good friend Bill Mathews’ investment newsletter The Cheap Investor is even based on the philosophy to buy a stock as close to its 52-week low as possible.

Research and Regular Monitoring is Key

The confidence that creates the foundation for an investor to be patient is developed by conducting solid research. If you have done everything you can to research a company before investing in them, then patience should follow easily. After sufficient research you will already be familiar with any issues or plans the company has; you will understand the industry and the sector and you will also have an idea of economic and industry trends that could affect it. This will create an early warning system of sorts that will tip you off to a legitimate time for selling.

In addition, you should be monitoring the stock’s price regularly-but not obsessively. By keeping an eye on the stock’s movement, you have a better chance of taking advantage of any wild price movements or market inefficiencies.

Avoid Selling too Soon

With small cap stocks, definitive upward momentum can take months and, in some cases, years. Sometimes, it doesn’t happen until final studies and product enhancements are complete on an emerging company’s products, or until the marketplace catches on to the quality of the company’s products. Sometimes, it doesn’t happen until the company signs its first big contract.

If you sell too quickly because you’ve grown impatient, then you risk missing out the gains that your well-researched stocks could eventually bring. And if you think the emotional rollercoaster of watching a stock do nothing is painful, then you should imagine how it feels to see a large gain right after you sell and no longer have any financial interest in the company.

Small cap stocks need time in order to work their magic. It takes time for a young company to grow roots in its industry that can effect widespread change that gets noticed by enough investors to create significant gains. Give your investments the time they need-don’t sell their potential short.

Example: Clearfield Inc (CLFD)

We had placed Clearfield, Inc. (CLFD), a designer and manufacturer of connectivity products such as fiber distribution systems, optical components and fiber and copper cable assemblies, on our watchlist in early 2008. At the time, its shares were trading a little over $1. The stock had a good valuation and a very attractive balance sheet. Because Clearfield was mostly active in rural areas, it didn’t face the strong competition it would have in more populated cities.

At the end of March 2008 I conducted an audio interview with Ms. Cheryl Podzimek Beranek, Clearfield’s President and CEO, to get a better understanding of where she wanted to take the company. I felt good about Ms. Beranek’s answers and bought my first shares at $1.07.

This is where the patience part kicks in. I continued to like the company and the progress it made, but regardless of my confidence in the company, its stock price didn’t budge. By January 2009, the stock had gone up to… $1.15 and I arranged for a follow-up interview Ms. Beranek. After that call I realized that my faith in the company was well placed-a fact that was reinforced in September 2009 when CLFD had risen 469% to $6.09.

Researched, well-thought-out investment decisions combined with patience usually work together to create a trifecta of success and returns when investing in small cap stocks.

Next week: How to Profitably Invest In Small Cap Stocks – Part 4: Selling

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