Predicting Change – The Secret to Small-Cap Investing


Humans have two common failings.

One is the belief that the time you’re living through is the most important period in the entire history of mankind.

The second is the failure to grasp and predict change. Or, put another way, your tendency to believe that things have always been “this” way, and always will be this way.

It’s only when you look back at history that you can see just how much things change. And when you do look back, it all seems so obvious. How could anyone not see what was going to happen?

Yet, at the time, it’s not so obvious.

For instance, if we look far back into history, in 239BC the Carthaginian Empire controlled much of the Mediterranean coast…


But just 139 years later, things had changed. The Romans controlled the Mediterranean…



And by the time the Roman Empire reached its peak, another 200 years later, it controlled 90% of Western Europe, and the entire Mediterranean basin.

Yet at any point between 239 BC and AD 116, most people would have had little understanding of the potential changes ahead and the impact on their lives.

But imagine if individuals at the time could have predicted the change. They could have used it to their advantage.

For instance, if a Roman businessman had predicted that Rome would need a fleet of ships to drive the Carthaginians from Sicily starting in 265 BC, he could have made a killing. It seems an obvious need – ships. After all, a stretch of water separates Sicily and the Italian mainland.

But until the First Punic Wars, the Roman Empire had only ever expanded over land. So there hadn’t been a need for a substantial navy. And so, it’s not surprising that boat-building entrepreneurs didn’t foresee the future need for ships.

But eventually the Roman war machine realised it needed ships. So it hijacked a Carthaginian ship and used it as the basis to design its own ships. A kind of ancient-world reverse engineering, if you like.

Small-Cap Investing is About Picking the Next Trend

There’s a reason we bring this up. The ability to predict and identify change is crucial to being a successful small-cap investor. Of course, it doesn’t mean you’ll predict everything. Only a God can do that.

And however good we may be at picking stocks, we’re certainly not a God.

But if you can anticipate some changes, odds are you’ll do very well from it. The questions are, what change and where?

Well, change happens in many places. It’s a mistake just to look in one place. That’s why we recommend you buy more than one small-cap stock for your portfolio. You can get exposure to a handful of opportunities, each of which is an agent of potential change.

If you do that, odds are you’ll eventually back a winner. And because winning small-cap stocks tend to rise by many multiples, you often only need one winner out of every three or four small-cap stocks you back.

Bottom line, looking for change before it happens is the backbone to small-cap investing. You can see that in the stocks on my recommended buy list.

In their own way, five of the six Australian Small-Cap Investigator punts are bets on change:

  • Punt #1 and Punt #2 – Developed nations looking to diversify their energy needs away from the Middle East to new and underexplored regions
  • Punt #3 – Exploiting a new form of natural gas using new technology
  • Punt #4 – Looking to gain advantage as energy demand switches from polluting fossil fuels to greener fossil fuels… such as natural gas
  • Punt #5 – The opportunity to profit as consumer entertainment needs change. As viewers move towards “pull” entertainment, and away from “push” entertainment.

Right now, we believe the African coast presents one of the best chances for speculative energy investors to make a big return… the coastline is huge, and much of it is almost completely unexplored.

But it’s not the only energy opportunity.

We’re also looking at others. We reveal more details on this in the next monthly issue of Australian Small-Cap Investigator.

Kris Sayce
Editor, Australian Small-Cap Investigator

From the Archives…

Why Graphite is the High Tech Commodity of the Future
2012-04-27 – Dr. Alex Cowie

Why Gold is Hands-Down the Best “Money” You Can Buy
2012-04-26 – Kris Sayce

12% Compulsory Super – Get Ready for the Government’s Next Tax Grab
2012-04-25 – Kris Sayce

Westfield – The Aussie Retail Stock That Could Make You Money
2012-04-24 – Shae Smith

Why Natural Gas Is Still My Favourite Resource Opportunity
2012-04-23 – Kris Sayce

Predicting Change – The Secret to Small-Cap Investing