The Daily Reckoning UK

Investing Through The Back Door

Pieter Cranenbroek

by

Posted 10th May 2017

There’s a way of stock market investing that sees much higher returns than most conventional methods.

By focusing on growth stocks you could potentially make ten times your money – much, much more than you can expect from well-established stocks.

The idea behind small company investing is quite simple.

You select a sector you find interesting, but instead of going for a big company that’s dominating the market you invest in a tiny company that’s wriggling its way in.

That’s obviously easier said than done. It’s why most of these stocks don’t go anywhere. But the ones that do can return investors a huge multiple of their initial stake.

It’s essentially taking an alternative way into the market. The ‘back door’ as opposed to the ‘front door’. More on what that means in a second.

I use the word ‘alternative’ here because most investors don’t take this route. They’d rather invest in stocks that are tried and trusted. Stocks that are already highly valuable, often called ‘blue chip companies’.

Avid poker players will know that the blue chips are worth the most in this particular card game, which is why ‘blue chips’ denote the crème de la crème of companies in their respective sectors.

There are plenty of reasons why investors would invest in blue chip companies. They’re well established and have proved to deliver quality.

These companies tend to be solid and are therefore less volatile than other stocks. For this reason they’re less likely to be affected by adverse economic conditions.

Only problem is: their real growth days are behind them.

Their shares are expensive and the returns they deliver will be moderate on a yearly basis.

“The way I see it there are two ways into the market,” says growth stock expert Mark Cartlich, who I sat down with the other day to question him on this topic.

“I differentiate between what I call ‘front door’ and ‘back door’ investing.”

I ask Mark what exactly he means by these two types of investing.

“I associate the front door with tradition. These investors look for familiar names, they look for things they know.”

And there’s nothing wrong with investing in a blue chip like Tesco, says Mark. There are pros and cons in both cases.

Investors will have to decide for themselves if they’re primarily looking to preserve or grow their wealth and if they’re comfortable with the risks that each route brings.

“The kind of stocks I’m interested in are growth stocks,” Mark explains. “I want to help investors grow their money fast.”

“The stocks I’m looking at come to the sector from a different angle. They take the back door so to speak.

“An example would be the telecoms sector. Vodafone could be a sound investment, but it’s unlikely to yield huge returns.

“The companies I’m looking at are tiny and therefore don’t need a massive slice of the market to become highly profitable, as 5% would already send their share price up massively.

“In short, these are companies with serious growth potential and I’m looking to capitalise on that potential over roughly a two-year period.”

Click here to find out which stocks Mark thinks are a BUY

Technological edge

Mark’s job is to find growth stocks that can deliver high returns in a relatively short period of time. The way he goes about this is by focusing on the market’s smallest shares.

The good news is that tiny companies don’t need a huge chunk of the market to send their share prices up.

The bad news is that even a small percentage share of the market might not be easy to come by if big multinational corporations have carved that market up amongst themselves.

So, how are tiny companies able to infiltrate markets with big, established names?

“Well, if we take the example of the telecoms market, then you could say it’s a huge market with plenty of room for competition. But that’s the standard answer.

“How it most often comes about is through technological advances. These companies have an edge in a particular sector, which allows them to get a foot in the door.

“Let me give you another example from the music business.

“Established companies like Universal Studios and Sony dominate the sector. But, thanks to new technology like music streaming services, the way people consume music changes, which allows new, small companies to get in.

“In this day and age, it’s usually technological advances that give tiny companies a way into the market.”

So, technological advances are an important reason why these companies find a way to compete. Are there any other features that these ‘back door’ companies have in common?

“I don’t think there’s necessarily one common feature that all the companies I recommend share.

“That said, one thing they may have in common is that they’re looking to ‘disrupt’ a specific sector. I’ve found such companies in telecoms and the music industry.

“But I’ve also identified a company in the energy sector that’s involved in wind farms. In this case the company does not disrupt the market itself, but it does profit from a disruption that’s occurred in that market.”

There’s a strict limit to the number of people that can sign up to your newsletter.

Does that mean there’s also a limit to how much individual investors can invest in these companies?

“I think there’s a definite restriction here. We’re speaking here about some of the tiniest companies in the stock market.

“For that reason I have a responsibility to limit the number of readers so every reader can make the most of these investment opportunities.

“I’d say there’s definite room for decent investment. I mean individual investors will come nowhere near the level where you’d basically own the entire company.

“That said, we need to keep the number of readers in check so it stays that way. It’s why we only open up membership to Microcap Millionaires, the newsletter I write, once or twice a year and we restrict the number of admissions.

“It’s also the reason why big players in the markets like hedge funds can’t invest in the stocks I recommend because they would end up buying the whole company. They simply deal with too much money to invest in these tiny growth stocks.”

That’s all from Mark for now. He sees the ‘back door’ to the markets as the only way to grow your money quickly.

If you’re looking to grow your money fast, I urge you to try out Mark’s newsletter focusing on the market’s tiniest shares.

You don’t want to wait too long, though. As Mark said, right now they’re only accepting 160 new readers.

Click here to start your 60-day trial and learn more about small company investing.

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