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There is absolutely nothing wrong with gambling at the casino. As long as you know you are at the casino.
I am talking about investing in small-cap companies. Where the failure rate is +90%. And it turns out the odds donât get better because a company decides to go public.
Despite the certainty of losses, the allure of the 10x return is addicting. Like winning big in Vegas. We keep coming back for more.

And to be fair, this part of âcapital formationâ although full of âhypeâ isnât wrong. Itâs often early, wildly inefficient, highly manufactured and, yes, full of scumbags and dreamers alike. But, at the end of the day, 1 out of 100 is an important discovery/idea that wouldnât have come from a large company or management consulting report (says one of my near genius entrepreneur friends).
Trying to find the next Tesla or Shopify is intellectually challenging, can be financially rewarding and itâs also fun. Because:
âThereâs always a bull market somewhereâ
But, how can we tell a real company from a stock promote?
Battle Scars.
I have been blessed with the opportunity of failure. Failing fast & failing often. There is no better way to learn investing.
Over my 15 year career as an analyst, portfolio manager & advisor I have listened to thousands of pitches, invested in hundreds of companies and worked closely with dozens of CEOs.
This journey has earned me countless battle scars. A few thankfully have healed into WISDOM I would like to share with you.
The most important thing is understanding INTENT. Nothing wrong with building a company that fails. As long as you actually tried to build it. The opposite is called a âpromote.â That is a company in the business of promoting their stock, nothing more. Buyer beware!

To figure out if a CEOâs intents are honourable, I constantly compare what they say to what they do. Iâve also created a TOP TEN LIST of Red Flags to help spot an âemperor with no clothes.â
Red Flags.
By no means is this list exhaustive or conclusive. A couple red flags does not make a diagnosis. But if the whole list applies to the deal you just bought then âHouston, we have a problem.â

- Unrealistic Hockey Stick Projections
We all dread that slide at the back of the pitch deck where the management teamâs eyes light up. Itâs where they show you they will be worth $1B in less than 3 years. And they havenât even generated one dollar of revenue. Scarier, is when they straight-line expenses. Meaning as the company grows they donât scale them accordingly. My father once met with a company that said they were going to capture â1% of the market.â He did some quick math and asked if they had a head of HR. They looked at him puzzled and said âNo. Why?â My father replied, âBecause youâre going to need to hire SEVENTEEN THOUSAND PEOPLE according to your projections.â

- âIf you can’t explain it to a 6-year-old, you don’t understand it yourselfâ -Albert Einstein
The smartest investors I know ask the simplest questions. Back in 2019, I co-hosted the biggest eSports investment event in Canada. No less than 15 minutes into the presentation, in front of 500 investors, one of Canadaâs top brokers who manages $2B asked:
âhey ya guys, this is all great but how do you make money at this?â⌠the room fell silent⌠no CEO could answer
No answer is your answer! To this day I only know of 1 public small-cap eSports company with meaningful revenue that can answer this question.
- How tight is your structure?
Founders who know their worth donât give stock away âwilly-nilly.â Weâve all seen the over-bloated share counts that leave us head-scratching wondering what the hell is going on. Instead of spending endless hours scrolling through SEDAR/EDGAR, I suggest you email the below questions to the Investor Relations person, the investment banker, your investment advisor or whoever sent you the deal:
1) How much $ has been raised in each financing? This will help you determine the average cost basis of the shares. For example, if a big chunk of shares was issued at $0.01 and you are buying at $1. Tread carefully!
2) How much money have founders invested and how many shares were they issued for free? This will help you determine how committed they are or conversely how much greed is in the punch bowl.
3) When are shares coming free trading? You donât want to buy a stock ahead of a lock-up coming off. Thereâs different lock-ups on different financings. Ask for a breakdown: # shares, financing price, free trading date.
Having a lot of shares outstanding is common. But you should know the dynamics involved. Think of it as a game of âWhack-A-Mole.â You want to understand when and where you are going to get whacked.
Rule of thumb: if a company has more than 100MM shares outstanding, is less <1 years old, and it takes 30 minutes and a whole excel spreadsheet with multiple tabs to explain when the âlock-upâ comes off (this actually happened to me), tread carefully!

- CEO constantly marketing not building
âNo amount of marketing can make a bad companyâs stock go up and stay there.â The best way to get your stock up is to roll your sleeves up and build a business. The CEOs that worry me are the ones who canât stop marketing. They are flying around the world constantly looking for ânew buyers.â The CEOs that donât worry me are the ones I barely hear from. When I do, their story and pitch decks stay exactly the same. Usually very boring. Take one of my favourite small-caps, Boyd Group (BYD-T), I literally donât think they have even changed their font in a decade!

- Frankfurt Listing & German Promoters
Thereâs nothing wrong with spending money on investor relations. Every company should have a strong one. But, if you see a company spending +20% of their budget on âawareness marketingâ and theyâve aggressively hired promoters ahead of their new Frankfurt listing (a promoters paradise), beware! Or all of a sudden you see a bunch of anonymous accounts on Twitter hyping the same company. $CRAP there might be an issue.

- Managementâs History
If the SAME management team has changed the companyâs sector multiple times like this â Mining>Crypto>eSports>Plant-Based â run! Please take a deep dive into understanding the teamâs past. Failures are fine, itâs hiding them that is not. Back in 2011, we kicked a former founder of Oilexco, out of our office during a pitch. We had lost a huge amount of money on this company. But, that wasnât the issue. It was that in convincing us to invest in his NEW company he showed us the Oilexco chart, only half of it. He removed the part where the stock nose dove to near zero (eye roll).

- Fluffy Press Releases
Real companies are too busy building their business to bother with ânon-materialâ press releases. If you have to read a press release several times to figure out if itâs important. Itâs not. The company is trying to create âhype.â Material Means = quarterly results, acquisitions, financings, management changes.
- Luckiest Person in the Room
You are NOT the luckiest person in the room. If you are saying to yourself âWow I have found a real gem here, and I am the first to hear about it,â please proceed with caution. Thereâs an old saying âthe best oil & gas deals donât make it out of Calgary.â Experts in their fields who are starting new companies first seed them with their own capital. Followed by friends and family, investment bankers and key brokers. Iâve never made money investing in some obscure private placement from someone on LinkedIn.

- Me Too
When thereâs an emerging theme like psychedelics with tons of money flowing in, avoid the âme tooâ deals. They usually appear +18 months after the boom has started. They are typically low quality promotes with no real assets. Specifically avoid private deals at this late stage in the game. These deals rarely go public. You will be left with a âbag of dead bodiesâ like one of my hedge fund friends likes to call them.
- Get $hit Done Person
Every company needs one of these. It doesnât have to be the CEO. But, if you notice that the entire team is made up of ex-investment bankers or consultants and no one who has actually built a business, be worried! Building a business is a messy & incessant grind. You need a borderline delusional, obsessive leader with street smarts who can drive the company forward through thick and thin. Make it a game of figuring out if they have one of these!

Always be Compounding.
I hope this list improves your odds of success. Thanks to compounding, a 1% improvement in your investment game a day makes you 37x better by year-end. Remember, small-cap investing is a game of numbers:
âIf you are shovelling shit keep going thereâs bound to be a pony in there somewhereâ
Howâs Grit Playing It
The reality is I invest in both. Itâs the 80/20 rule for me. 80% invested in REAL small caps and 20% in promotes. Sometimes I donât know I am in a promote until itâs too late. Sometimes itâs a really good promoter who brings me a deal and itâs the start of a new new emerging theme. So, I dabble.

But, if I am completely honest and tally it up, Iâve lost more than I have won playing the promote game. Nine times out of ten they only work for the dealmakers not the investors.
If you want to know which small caps I own that fall in the âSuccessful & Real Company â bucket, please read my newsletter from 2 weeks ago HERE.
âAll Great Companies Started As Small Companies. Find Themâ
Donât forget to follow me on Twitter. Where I give daily insights on stocks.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S Bitcoin is now bigger than JPMorgan Chase. AND almost bigger than all 5 Canadian banks combined ; )

What else we Grittinâ On:
IPO POPS. First day gains are UP significantly in 2020. Because float size is down +50%. Will this trend continue?
TikToK REITs. Mansions with TikTok stars are now publicly traded. Seems frothy.
Digital Theme Parks. âThe Most Important Media Businesses of the Futureâ. Great read as I do my DD on the upcoming Roblox IPO.
AirBnB. Released its S-1 filing to go public. Shocked they actually made money: $219M in profit last quarter.
Who Wears Short Shorts. The Fed has nearly put an end to short selling. Where my favourite short sellers at?
