The Shabbat screener: why I'm betting on microcaps

Hi, it is JJ, writing at night after Purim¹ ended.

I have two goals regarding the newsletter in the coming weeks:

To catch you up on the positions I’ve already taken
And to write about my new research

But first, as a quick intro, I want to answer two questions:

Why do I invest in microcaps
Why write about it

Why do I invest in microcaps?

“Every great company started small.”

This is the line that you are going to hear when you start digging into the microcap world. I’m not sure this is true, or at least there is a big survivorship bias² to it.

But it is also the place where many companies go to die, so why would I, an SDR trying to break into a RevOps role, pick microcaps as my investing arena?

I have time

I do not know if you are religious or not. Either way, as an Orthodox Jew, I have a full day, every week, with no phone and no screens. I usually pass the time connecting with God and family, resting, and sharpening my mind by reading nonfiction. I don’t remember the last time I read a romance.

Reading a book is a two-sided conversation, and I love reading nonfiction business books, so if I love having a conversation on Shabbat about business, why not talk about a specific business (10-Ks) rather than reading about business in general (books)?

And a microcap 10-K is something you can do in one Shabbat.

It will teach me

As someone who has another 30 years of career ahead of him, reading about as many business models as possible, seeing how companies are struggling, and coming up with solutions will teach me more than anything else.

When you read a 10-K or 10-Q of a company, you learn a lot, and it’s easier to analyze because there are only 1 to 4 business units.

The math is there

As we go on, I will bring more and more sources, but for the moment, here is the simple math.

There are ~1741 stocks in the US that are between $10M - $400M.

Let’s say that for every 20 companies, I decide to read 1, meaning 1741/20 = ~88.

While improving my process, the screening process will become much quicker (there will be a post on that). If I end up investing in 10, it will take me around 2 years to build real knowledge of the microcap world. That knowledge compounds.

The best options

The microcap world is where you see the biggest swings. Given my current capital, microcaps offer the best return on my money. My approach: hoard cash for 3 months, analyze, then take a position. Maximize the reward, minimize the risk.

According to AAII O’Shaughnessy Tiny Titans Screen, it has averaged 25.9% annually³ if you buy 20-25 micro-cap stocks and sell them every year.

Why write about it?

Investing is a lonely process, and you can fall into all kinds of biases. If I force myself to have a conversation with you, the reader, it forces me to think more critically.

It can help me build social capital so that, when I reach out to investor relations with questions, they might be more open to answering because of you.

It would be a shame if my journey took me where I want to go and it wasn’t documented. If it doesn’t take me there, there are probably important lessons to be learned from it, and it would be a shame for them not to be written down.

Happy Purim, everybody.

Yehuda JJ Adler