Discounted For Risk

What can I say about the tiny company that is MicroVision? I don’t know any more than any other non-insider, and the insiders shouldn’t be saying anything. Investing in stocks can be a powerful way to manage your money, but you’ve probably heard the caution, “With the potential rewards, come risks.” The less commonly heard insight is, “As the potential rewards increase, so does ignorance.” A lot of people want to know what’s going to happen to MVIS, just like a lot of people want to know what’s going on with any small, highly speculative stock. The speculations make for great conversations, but they make for a difficult investment strategy. Long Term Buy and Hold of small stocks test risk tolerance, patience, and objectivity – all in the hope of rewards.

MVIS is a story stock, because MicroVision is a story company. This is the obligatory paragraph that acts as the opening scene in any serial TV drama. For those just tuning in – I described MicroVision in a post in October 2011, called Micro Vision. For those who don’t like clicking on links, the short version is that MicroVision has a disruptive technology that can create the next generation of displays. Computers in the house were revolutionary, but worked from TV sets. Then came high-quality CRTs. Then thin screen LCDs. Now laptops, tablets, phones, and even watches have thin displays.

First Gen ShowWX (about the size of an iPhone - so maybe the next gen fits inside a watch?)

First Gen ShowWX (about the size of an iPhone – so maybe the next gen fits inside a watch?)

MicroVision has the technology that projects laser-sharp images that are always in focus, and can do so with less power, materials, size, and cost (we’re told) in packages so small that they can become as ubiquitous as the cameras embedded in those very same laptops tablets, phones and even watches. The previous posts dive into the technicalities and possibilities. Visit the discussion boards for more depth than I can provide. (The Motley Fool, Investor Village, Silicon Investor)

MicroVision has held such promise and claimed such possibilities for years. For about ten years, I’ve heard yearly estimates of their expected profitability – almost always about 9-18 months away. Supposedly, every day is progress towards that goal, but the stock has been on a bumpy downhill ride since the bursting of the Internet bubble. The downside has been a lot of losses for shareholders who’ve had to sell. The upside has been cheaper entry points for people who can buy. For the price of a pair of skis and boots someone can, in one purchase, accumulate a position larger than the one I’ve acquired from over a decade of acquisitions (which has a total cost equivalent to a very nice car.) The price has decreased while the potential value has remained roughly the same, which means the potential reward continues to grow.

Unfortunately, the logic that suggests buying very low now is barely changed from the logic that suggested buying seemingly low in 2005. We as shareholders can see the price, and can estimate the company’s present value based on a discounted future revenue. The logic and the math have suggested buy, yet the reality has yet to reveal a real reward. Ah, but now success should be so near and the price so low that the risk is minimized. Maybe. I don’t know.

One of the problems with buying stock in small startups is that they have no history of product revenues for a credible analysis. They do produce financial data, as every corporation must, but the reported revenues and expenses mean little when trying to assess the potential of the mature company and its resultant stock price. Small startups tend to work in secrecy for competitive reasons, because they are restricted by partner and customer agreements, to preserve reputations and careers, and because frequently there is little to say.

We as humans don’t like unknowns. Unknowns are verbal vacuums that we fill with stories. Shareholders know that no secret is perfectly secure; so, without quantitative reports, we dive into news from suppliers, we parse press releases, we dissect videos and other companies’ conference calls, and try to develop a picture that isn’t being officially revealed. It can sound like a foolish game, yet that game is precisely what the larger institutions are doing with teams of researchers and analysts.

So, why invest in something with such great unknowns while competing against teams of professionals? Because we investors in small companies aren’t necessarily competing against teams of professionals. The firms that are too big to fail spend little if any time with companies too small to bother with. Big institutions with big accounts want to invest in big companies because it is easier. If they need to invest $1,000,000,000 they have to research, analyze, and completely buy about 30 companies the size of MicroVision; or, they could buy a slice of a mega-corp in much less time and have much less risk. The mega-corp’s stock may not go up as much, but they’re less likely to lose their jobs if it drops.

In any competition, find your advantage that matches up against the other’s disadvantage. Individual investors buying stocks in well-known companies are competing on the territory owned by the institutions. That’s one reason I invest in small companies, but only in small companies that can potentially become big companies. I buy stocks that may be ignored now, but that can’t be ignored if the company succeeds.

Until the last couple of years it has been a strategy that served me well. (Want data? It’s in my book.) Dream. Invest. Live. As others who have analyzed my portfolio have noted, my stocks were hit by a perfect storm of bad luck. I think my portfolio’s performance has also been exacerbated by the current money flows within the market. The Fed’s quantitative easing and the disordinate accumulation of wealth has meant large piles of money are hunting for large havens. As a result, the market cap driven indices are setting records while many stocks languish.

At some point, the money that’s trying to get higher returns will have to look for alternatives. The money should flow back to the small startups. But there’s no guarantee. Maybe all of those investors will convince all of those companies to produce handsome dividends; and investing in small companies will fade, in which case, so will innovation.

I can’t say that at some point MicroVision will succeed. The discussion boards and private correspondence suggest that I am not the only shareholder who interpreted management’s comments as signs of success in 2013 (or 2012, or 2011, or 2010). We’re running out of year. Since the recent conference call, the private communications have increased, frequently including a dichotomy: re-analysis confirming potential rewards, versus an emotional awareness that the company, through competitive pressures, technical hurdles, or poor decisions may never succeed.

I can say that the daily fluctuations in the stock price of such a small company can look large and significant when measured against its pre-success value, but are small and meaningless when measured against the future value of its mature, successful self. I’ve seen it happen. I enjoy the speculations in words and investments (despite the current financial pain), but I know that the only thing to truly react to will be quantitative positive news and the consequential stock price move. Then, when it is a stock the institutions absolutely must have, I’ll be much more agreeable to taking enough of their money for some of my shares. Their unwillingness to take risk and encourage innovation will mean that their rewards will be discounted.

Or, the stock they overlooked will vanish, never to be looked at again; and their cautions will be justified.

I wish I knew.

About Tom Trimbath

consultant / entrepreneur / writer / photographer / speaker / aerospace engineer / semi-semi-retired More info at: and at my amazon author page:
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One Response to Discounted For Risk

  1. Peter says:

    Nice article Tom!

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