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Have you ever wondered why more people don’t invest in junior mining and/or small-cap companies?

As investors, we often see returns over 100% within short time periods in this space, so what’s scaring so many investors away?

Well, have you ever asked? I have.

Some of the answers have been:

• “I knew a guy who invested $10k in a junior mining company, only for me to discover the ‘project’ was little more than a hole in the dirt. I stay away from it now. “

• “I put a few thousand in a mining company and the next thing I heard a few years later was that the company was now a healthcare company, how could that be?”

Now for the first guy, sometimes a hole in the ground is all you need, so maybe he just doesn’t know what he’s talking about - or he was right and it was a scam.

The second guy might have a point - while this is fairly common practice (one company fails and is used as a ‘vehicle’ for a new company), it highlights issues that investors have with early stage companies.

How do you know which early-stage companies are worthy of investment? With so many people trying to get rich quick…

The answer is not simple.

When I look at a small-cap company, I look at 3 things:

1. Project

2. Financials

3. Management

Take a guess which one you think is most important:

The answer is management - and there is one very specific reason why.

There are a lot of ‘Bad actors’ - and their companies exist solely to extract investor money and put it into their own pockets - while doing almost nothing to advance the project.

They take investor money under the hopes of ‘discovery’, rarely provide updates, pay giant salaries and go for lunch every day on the companies dime.

These companies sometimes operate for years, never making any progress.

When the company finally runs dry, what does management do? Well they start another one just like it and repeat the process.

We call them lifestyle companies because they fund the lifestyles of management, not much else.

How can you identify these companies?

Here are some red flags 🚩

• Minimal Progress - In the past year, what have they really done?

• High Founder Salaries - If they’re paying themselves over $200k/yr, they better be making progress.

• Low Reinvestment - What sort of money has been spent on the project? It should be the majority.

• Limited Transparency - Are they open about the business? Do they update investors regularly?

Also, look at the insider trading reports, are they buying shares? No? Well thats sort of weird for someone who get paids over $200k.

Having no skin in the game is a huge red flag.

There is money to be made in small-cap companies, but unfortunately that also opens the doors to criminals.

Long time small-cap investors know who to look out for, but by keeping an eye on a few key aspects of the company might end up saving you thousands of dollars.

👋 Colton, Stock Monster.

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This newsletter is for informational purposes only and should not be considered financial advice. Always conduct your own research before making any investment decisions. We have not been compensated in any way for this pick or content; we genuinely just like it. Assume that contributors to articles own or have interest in stocks they talk about, therefore may be bias.