Investing in micro caps poses a challenge for stock pickers. There's lots of noise in the data and, as we saw in the previous post, investing in micro caps requires expertise in many different types of investment situations—venture, growth, distressed, etc. This post attempts to cut through some of the noise inherent in micro caps to level the playing field.

For this post, I define the opportunity set of micro caps a bit differently than common benchmarks. I discuss some of the fundamental drivers of micro cap businesses and how their stage in the business life-cycle can distort fundamental metrics. Historically, 41% of the universe is in some sort of transition—evolving to new heights or devolving towards liquidation—which creates lots of noise in the data, and scares lots of investors away.

I've recently been exploring the world of micro cap stock investing. You don't hear much about this space except from the occasional banner ad promising a 10,000% return in a week by buying penny stocks. So I think micro cap gets a bad wrap. This is the first installment in a series on micro cap stocks. This area of the market is a playground for disciplined investors that believe in the power of factors.