Shares of your most coveted small-cap stock creep ever closer to hitting the magical triple-digit mark, like a broken man inching his way towards the edge of a cliff.

You’ve followed this winner for three years. You’ve watched the business grow. The 1,000 shares your broker picked up for $15 have soared more than twofold. They’re set to go even higher.

But even though the stock sits anxiously at $99 and change, poised to strike… The undeniable fact remains: Breaking the proverbial high water mark of $100 per share will take much more than some trivial rumor prophesizing another sexy multi-billion international M&A deal.

You see, most investors fear shares trading above the $100 plateau. It scares them.

No one really seems to know why… Rationally speaking, buy and sell decisions should be made relative to some intrinsic value. But as we all know, that seldom seems to be the case.

Everyone in the business seems to have their own magical formula for predicting price movements. Traders stare at charts. The value guys covet balance sheets. And a select few move solely on the word swirling around the office watercooler.

I gravitate towards the balance sheet. But that’s not for everyone. Each investor needs to find his own particular style. Even our blind squirrel perched atop the watercooler finds a nut from time to time.

But despite one’s particular method to his madness, one thing’s for sure. Most independent investors avoid shares trading in triple digits.

I like to call this utterly ridiculous phenomenon the “Little Man Syndrome.”

No one wants to be the little man.

When your neighbor stands over the hedges and proudly boasts that his broker just slipped him into 10,000 shares of some obscure, small-cap nanotechnology company, I understand that you’re justifiably reluctant to respond with: “Well, my broker just secured 100 shares of the world’s third largest steel company!”

No one likes to log on to his discount brokerage account and see the fruits of your ten thousand dollar bonus displayed in 80 shares of PetroChina.

That has the sex appeal of your ‘98 Ford Windstar. Sure, it’s practical, reliable, and safe. But you want and edge. You want something that goes 0 to 60 in less than 15.6.

I don’t blame you. No one wants to live in the right lane all his life.

You want to feel like the big boys…to be a part of something. You want to matter.

You want to attend a stockholders meeting for something more than the free drinks and cheap finger foods. You want a say.

You’d rather open your account to find 15,000 shares of some, obscure, cash-burning penny stock whose name you can barely pronounce, running a business even the brightest mind would find difficult to comprehend.

Managements know this. They know you want 20 shares for the price of 10. That’s why they invented the stock split.

The point: Investors prone to the Little Man Syndrome are, by default, also prone to follow small-caps. It’s common sense.

So the next time you’re huddled around the watercooler listening to Doug from marketing spout off about some unknown Argentinean gold mining stock…and the little man conveniently appears on the edge of your shoulder, gently whispering it’s a good idea to park $10,000 of junior’s Princeton fund to snag 20,000 shares…please put down the Kool Aid and walk away.

You see, it’s time to separate yourself from the investing masses.

As an investor, it’s time to protect your assets so they can grow. Successful investing will require a combination of patience, realistic expectations and — most importantly — buying shares of businesses at the right prices, regardless of how high that price may be.

As investors, we’re looking for a margin of safety…companies trading near or below their intrinsic value with an established earning power.

That’s basically it.

I admit that, more often than not, small-caps make for a good story. There’s nothing wrong with a good story. Just make sure the good story stems from a good business at a good price.

Until Next Time,
Christopher Hancock
February 23, 2007

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Christopher Hancock

Christopher Hancock lives and breathes emerging markets. He travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

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