4 minute read
“An Exercise in Clear Thinking”
Here’s an oldie but a goodie . . . What weighs more, a pound of bricks or a pound of feathers?
Most people’s natural inclination is to say, “obviously bricks weigh more than feathers”. This is true, a brick weighs more than a feather, but a pound of anything is still a pound, so they weigh exactly the same. This question has been successfully employed for generations to torment small children and semi-inebriated pub goers, disguised as an exercise in clear-thinking. In retrospect maybe the question should be “Would you rather have a pound of bricks, or a pound of feathers?”
Considering that the average red house brick weighs approximately 5 lbs it is probably easier to compare a brick to 5 lbs of feathers and yes, they would still weigh exactly the same! If you wish to purchase said house brick, rather than liberate it from your garden wall, or purloin it from a local building site, this will set you back around 50 cents. The same poundage of quality Canadian goose down feather stuffing can be purchased for $79.99 online and delivered free by Amazon. Accordingly, by making the astute choice of selecting the feather option in preference to house brick represents 160 times the value of the much-utilized building material. As a side by side, or pound for pound, as the case may be, comparison of utility, 5 lbs of fine Canadian goose fluff will insolate you from the chills of winter and/or provide a comfortable pillow or cushion…try doing that with a house brick! No one is advocating however that you should build your house out of feathers, bricks still have their place.
So, unless you are planning to corner the brick or the feather market sometime soon what is the point? I guess, in a somewhat convoluted and probably obvious way, I am saying things are not always what they appear to be at first glance. Let’s say there is a stock trading at $10 and another stock trading at 10 cents, which is the better company? Most people will gravitate to the $10 stock because there is a perception that stocks trading at higher prices have more market credibility, whereas anything trading below $3 and particularly below a dollar must be rubbish. What if the $10 stock had been at $100 a week ago and the 10cent stock had been 1 cent. The $10 stock is falling faster than a red brick in the ocean, whilst the 10cent stock is a new market darling. The $10 stock may only have 1 million shares on issue whist the 10cent stock could have a billion shares on issue, so we have a $10 million market cap company versus a $100 million market cap.
Barring a very rare, usually tech related “market flyer”, when do you ever see $10 stocks instantly jump to $100? At the MicroCap end it is relatively common to see stocks go from a penny to 10 cents or even a dollar over a short timeframe. It is far more prevalent in junior mining stocks, where a new discovery can excite the market and exponentially increase share prices and market caps, but it happens in other sectors, like biotech and tech, where positive or game changing news is disseminated and rerates the investor appeal of certain companies. Australians, and our Canadian cousins, are well known for our love of penny stocks, the cheaper the better! Technically this should make no difference to share price growth because the value of a company is based on the number of shares times the price, however psychologically, experienced MicroCap investors know the leverage is always better with low priced stocks and the volatility helps to create an active trading environment.
With an increasing number ASX, TSX and CSE stocks establishing dual trading on the Over-The-Counter markets, OTCQX, OTCQB and Pink Sheets in the US this is creating opportunities for US investors to get down and dirty in Penny Stock Land and take advantage of the leverage this can offer. Is it riskier, in most instances absolutely it is, but perceived risk is relative to expected return. If the investor’s primary focus is asset protection or a steady dividend income stream you are likely not seduced by the MicroCap space to begin with, and specifically penny stock opportunities. For the rest of us we are up to our necks in analysis and due diligence, trying to sort out the wheat from the chaff, the apples from the oranges and the bricks from the feathers. I should add that a pound of feathers has far more surface area and far lower density that a pound of bricks, so I know which one I would prefer to land on my skull from a high vantage point.
To conclude, there is no substitute for research and analysis. The MicroCap sector can have its challenges, as it is usually bereft of quality independent research. Investors therefore need to roll up their sleaves and do the research themselves, follow successful management teams and/or the recommendations of well-respected industry professionals.
Wishing everyone success in their MicroCap investing and successfully turning their speculative endeavors into solid “bricks and mortar” positions, although sometimes it will undoubtedly end up as “tar and feathers”.
Richard Revelins has worked as an international investment banker for over 30 years and specializes in listed public companies. He is a co-founder of Peregrine Corporate Limited based in Australia and is also a Managing Director at Cappello Group Limited based in Los Angeles, USA. He currently resides in Venice, California and divides his time between the US and Australia.
