What Makes a Successful Small-Cap Investor?

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Yearly Video Review

An interview with Thomas Garrity

With Money To Burn One Finds A Match

In Case You Missed It

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For this week's Stock Market Video, the last one of the year, I decided to do something a little different and look back at all that has happened in 2012.

This is not our regular Cabot weekly review but a whole year in review. Paul recites a poem that recaptures both the high- and low-lights of the year. I hope it proves to be useful and brings up a smile. Click below to watch the video! 

Paul Goodwin, cabot heritage corporation, yearly poem

Editor's note: This is the first in a series of interviews with Thomas Garrity, Analyst and Editor of the limited-subscription newsletter, Cabot Small-Cap Confidential. A lifelong investor, Tom has been a stockbroker, stock analyst, venture capitalist and portfolio manager. His long career and varied experiences taught Tom to make investments only when the odds of winning significantly outweigh the risks. He applies this philosophy to every stock he recommends in Cabot Small-Cap Confidential.

Tom's disciplined investment methodology uses a series of qualitative and quantitative metrics that are evaluated for each company under his investment consideration. The company's products must target large markets, the science or technology must be proven, the balance sheet must be strong enough to support research or investment activity, and the idea must be strong enough to attract future institutional investment.

Tom's analysis results in a portfolio of stocks of companies that are pioneers in their areas of business. In most cases, these companies are creating whole new micro-industries, providing essential tools for an entire industry's growth. Because these stocks have little or no institutional or research coverage, Small-Cap Confidential subscribers can acquire significant positions in these companies more cheaply than if their stocks were widely followed.

How would you describe the ideal Cabot Small-Cap Confidential investor?

Good question, and fun to answer because the ideal Small-Cap investor is a lot like me!

The ideal Cabot Small-Cap Confidential investor absolutely loves making money. And their passion for earning money lies entirely in the pursuit. It's all about unearthing the investment and getting paid for the research effort.

Whether novice, well-seasoned or professional, the successful Small-Cap investor is well aware that investing isn't about reaching into your pocket and finding an instant win lottery ticket. Instead, he or she knows that you need to work at investing to making money at it.

The successful Small-Cap investor realizes that investing is like running your own business. Some stocks (inventory) are going to get sold at a sizable profit, while others stocks (merchandise) may be sold at just at or above cost, or even for less than what was paid.

The Small-Cap investor also knows that to be a prosperous investor means having more checks in the win column than in the loss column.

I know from my own experience that chance favors those who do the most comprehensive due diligence-so with the right stock research, Small-Cap investors greatly increase their chances of realizing multi-bagger home runs.

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The point I want to drive home about the ideal Small-Cap investors is his understanding that getting an informational edge when it comes to stock analysis is of paramount importance.

He knows that the right or wrong stock selection can sometimes have life-changing effects-and that's why the Cabot Small-Cap Confidential investment strategy is steadfast.

Successful Small-Cap investors don't try to be jacks-of-all-trades, applying many techniques for picking winning stocks; instead they stick with the tried and true strategy.

What's certain is that Small-Cap investors are patient, willing to sit tight long enough to earn enormous profits when the stock separates from the pack.

Small-Cap investors prefer to invest in shares of companies that have exciting new ideas, game-changers in new themes or trends-and always, these new products or services serve a very large market.

Lastly, Small-Cap investors only invest in companies in which risk variables can be quantified, thereby avoiding hunches or half-baked concepts, and focusing on companies with a high likelihood of providing tremendous upside performance.

A Cabot Small-Cap Confidential investor might be a beginning investor, trader, stockbroker, portfolio manager or the eat-drink-and-sleep-investing variety (like myself).

But one definite characteristic of the successful Small-Cap investor is that he's focused on the outfield bleachers-the big ideas that are lurking behind left, center or right field.

Furthermore, the Small-Cap investor is also patient, understanding the value of getting another chance at bat in order to round the bases.

But most important, the Small-Cap investor recognizes the power of gathering high quality, company-specific research in order to win the ballgame.

What's an example of a Cabot Small-Cap Confidential stock pick?

I recommended EZchip ( EZCH ) (formerly known as Lanoptics) in September 2007. EZchip is a manufacturer of network processing units (NPUs), which are programmable integrated circuits that combine the cost/performance of a static function ASIC chip with the programming flexibility of a microprocessor. NPUs go inside Ethernet switch routers.

I chose to invest in EZchip after studying the market timing for its products, the significant customer need which its product solved, the captive OEM partnerships the company had already formed and the cost of the overall solution provided.

EZchip's NPUs were slotted in the line cards of routers designed by companies like Cisco, Juniper, Ciena, Alcatel and Marvel. (Routers are in charge of connecting and moving traffic around data/voice/video networks.)

Routers were getting choked up trying to accommodate the bandwidth demands on the central processing units (CPUs). The EZchip NPU soon became in high demand by network equipment providers for its ability to relieve the bottleneck on the CPU by integrating pipelined operations and it was inexpensive relative to comparable technologies.

We sold EZCH in August 2011 for a 60% gain.

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cabot heritage, button Here's this week's Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.

With Money To Burn One Finds A Match

If it's true, the best defense is to avoid being in a position where there's money to burn … which means keeping your money working in the market, or at least earmarked to work.

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In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 12/24/12-- Best Dividend Stock Picks of 2012

In this issue, Dick Davis Digests editor Chloe Lutts lists the best-performing Dividend Digest Top Picks of 2012. Stocks discussed: Marathon Petroleum Corp. ( MPC ), McCormick ( MKC ) .

Cabot Wealth Advisory 12/26/12-Investing in Microcars

In this issue, Cabot Stock of the Month editor Tim Lutts writes about Bruce Weiner, collector of Microcars. Tim mentions that even though he likes microcars, he will continue to invest in stocks. He names the second stock to hold forever -- Jamba Juice ( JMBA ).

Cabot Wealth Advisory 12/27/12- Two Blasts from the Past

In this issue, Cabot Benjamin Graham Value Letter editor Roy Ward talks about the importance of Book Value when researching stocks. Stocks recommended: Corning, Inc. ( GLW ) and Xerox (XRX) .

Happy New Year!

Paul Goodwin
Editor of Cabot China & Emerging Markets Report



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: EZCH , GLW , JMBA , MKC , MPC

Cabot Heritage Corporation

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