7 ways to become a better small cap investor

Last week we published a podcast with a very special guest, Angie Ellis from 8020 investments, who is regarded as one of Australia’s most successful private investors.

I enjoyed the podcast hosted by colleague Patrick Poke so much that I listened to it four times. What really impressed me about Angie was her level of curiosity and the way she takes doing research to the next level (I think she must have been an investigative journalist or a detective in a previous life!).

The interview, titled ‘How an everyday investor competes with the pros’, is on track to be the most successful episode within our The Rules of Investing series. It has already been played over 9,000 times and topped its category on Apple Podcasts.

It’s easy to see why the episode resonated with investors. Her knack for consistently winning the Fairfax share tipping competition has made her a star in the retail investing community, and with nearly 100 likes on the original podcast wire our audience has expressed overwhelming positive feedback about how she openly shared the trials and tribulations in her journey to become a successful DIY investor.

In this wire, I recap the 7 most important lessons from Angie to help those who are aspiring to follow in her footsteps of making investing for themselves a career. And here, Angie has kindly offered additional information and tools on top of what she mentioned in the podcast.

1. Get ideas from things around you

Some of Angie’s best investment ideas such as Afterpay (ASX:APT), A2 Milk (ASX:A2M) and Lovisa (ASX:LOV) have come from her interactions in everyday life.

As an example, she discovered Afterpay shortly after its IPO when she agreed to assist a friend who worked at a clothing department store and went to the layby room to try and find customers’ orders.

“All day people would be calling and popping in to check their laybys. We only made one sale that day but we were very busy managing the laybys. I just knew Afterpay would be huge because it would solve that problem and I know for that high-end clothing store, when they put in Afterpay, they stopped doing layby altogether and it saved them a lot of time,” she says.

Lovisa, a key position in her long-term portfolio, came from being a happy customer. She got the idea for A2 Milk after discovering a big stash of the company’s namesake milk bottles in a friend’s fridge, and after further research (in the next lesson) decided to buy in at 88 cents.

2. Get more detail by talking to people

Getting a superficial idea of whether something is popular is one thing, but you need more detail than that in order to make an informed decision.

Whether it’s chatting to people behind the counter, the IT manager, sales representatives, competitors or CEOs – Angie speaks to people to get a better handle on how a company’s stores and products are performing.

With Lovisa, she’ll often visit the shops to see how busy they are, observe customers and talk to sales staff to gauge whether the store activity stacks up with what management is saying about the company.

During the week she discovered A2 Milk, the AFR had been full of articles about the demand in China for milk formula, so she spent all week researching the company and visiting Chemist Warehouse stores to talk to staff about sales of the A2 Milk formula.

People seem happy to give her information to help her, and often she’ll stumble upon some golden nuggets during conversations.

For example, when she spoke to Darrin Grafton, the CEO of corporate travel management company Serko (ASX:SKO) and asked how she can find more companies like Serko earlier in their growth phase, he suggested looking at the NZ Hi-Tech Awards.

"Darrin said that NZ companies tend to focus globally from day one and so this is a really great place to find emerging companies like the next Xero or the next Serko. They’re often being nominated for a NZ high tech award,” Angie says.

Useful tip

• The NZ Hi-Tech awards website can be found here (Angie hopes to attend the Gala Awards dinner in Wellington in May this year)

3. Try companies’ products

If you don’t try a company’s products, how do you know if they’re selling something that customers love and will make the business succeed?

“Private investors should do that a lot more – see your stocks as businesses and try their product."

As an example she set up accounts with Afterpay and Pushpay (ASX:PPH) to see what the customer experience was like before deciding to invest in them. And one of her most successful investments of 2019 was Tinybeans (ASX:TNY).

“My niece had a baby in April so I got her to set up a Tinybeans account so I could understand the Tinybeans photo sharing app. It really gave me confidence because I was using Tinybeans and seeing my niece’s baby photos,” she says.

4. Get to know company management, and follow them on social media

It’s critical that investors get to know the managers of the companies they hold – after all, these people are the main reason your investment can be made or broken.

Useful tips

Angie suggests several avenues for getting to know management:

• Subscribe to company updates so you can be notified of announcements and investor or live presentations. During these presentations, you may be able to ask management questions from the comfort of your own home
  
• Attend Annual General Meetings – all listed companies’ websites have an investor or shareholder centre outlining key dates for events including AGMs
• Industry events or investor days such as Livewire Live, ASX CEO Connect and Australian Microcap Investment Conference where CEOs of emerging companies outline their growth strategies to retail investors
• YouTube videos to view past management presentations and watch product demonstrations
• Trade events where investors can talk to sales managers and try companies’ products 

Angie also likes to be a social media butterfly and follow the companies she’s investing in and their executives on Twitter, LinkedIn and so on to get important updates and to see how they’re promoting themselves to customers.

5. Monitor directors’ trades

Angie religiously monitors insider trading from companies as a daily habit. This shows whether key people from the company are buying or selling shares, and the latter can sometimes be a portent of things to come.

“I had a big position in Vocus (ASX:VOC) in 2016 and the CEO sold 76% of his Vocus shares in August for like $8.30. I saw that director’s trade and I sold straight away and that was a great thing to do as the price has kept coming down after that,” she recalls.

Useful tip

• Angie uses the Market Index website’s Directors’ Transactions page to keep an eye on insider trades

6. Track your returns and be accountable to them

A critical part of successful investing is measuring your returns as it helps you understand whether your strategy is working or not.

“I tell investors ‘I really want you to find an easy way to report your return so you know what your returns are – it could be on a weekly, monthly or annual basis’,” she says.

On top of this, investors should find someone to report their performance to so they get a sense of accountability.

“Professional investors, often fund managers, have to report returns monthly and publish it so everyone knows what’s going on. I think private investors should do a similar thing – they should treat themselves like they are a fund manager’,” Angie suggests, adding that this will help investors better manage stop-losses.

7. Losses happen - learn from them

Taking a loss happens to the best of us. Take it from one of Angie’s first trades six years ago: buying The Reject Shop (ASX:TRS) at $16.75 and selling it two weeks later at $10.80 for a 36% loss.

“I had a big position and wasn’t very diversified at the time because I really just started getting full time and I sold straight away. It was a really bad start to this new adventure and affected my confidence a little bit and my capital,” Angie says.

While a harsh lesson, Angie is all the better for it, as the incident helped improve her portfolio risk management skills.

Additional tips

Make a trading plan that tells you:

• The condition which you should enter the stock market. If the overall market is in a downtrend then it isn’t a good idea to buy any stock at the moment
• What stocks to buy
• How many stocks to hold
• Can you repurchase stocks?
• When to sell

When analysing companies, she suggests looking at the following metrics:

• Return on assets
• Return on equity
• Earnings growth
• Growing dividends
• Low debt or no debt
• Directors' trades
• Fund manager interest
• Rising share price

These other resources can be useful for investors to keep tabs on what their companies are doing and in order to learn more about the market:

• Livewiremarkets.com
• Marketindex.com.au (to monitor director trades)
• Shortman.com.au (to monitor shorting activity)
• The Financial Review
• Trade magazines
• Join investment groups
• Subscribe to fund manager newsletters to monitor their buys and sells
• Read One Up On Wall Street: How To Use What You Already Know To Make Money In The Market - By Peter Lynch
• Watch this video with Ray Dalio on open mindedness

Access the full podcast

I hope you enjoyed these tips from Angie!

The link to the original podcast is here. If you're enjoying The Rules of Investing and don't want to miss a future episode, subscribe now to get notified when a new episode is released.

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