[🆓post]FTEK vs. TGEN: Sizing Your Conviction To Get A First Mover Advantage

Big bets with only average conviction

What follows is a guest post I wrote on Geoinvesting for their Sunday Weekly Wrap-Up newsletter, published yesterday👇

Since our substack is growing extremely quickly, something we truly want to thank you for, I thought this next investment process post would be very relevant to our product.

As you know, our Microcap Quality Index (MSMqi) is accumulating a lot of stocks, hunting for multibaggers.

This post may help you develop a framework of how to approach picking stocks from the MSMqi that you might want to own, when you’re not quite there on conviction.

By the way, on that note, we’re about to add three more stocks to the MSMqi.

Hope you enjoy this investment process post 👇

First Mover Advantage

One of the key reasons I’ve had success in microcap investing is because I’ve never been afraid to move early, not because I’m necessarily better than the next investor. In fact, I’m just an average dude who likes turning over rocks, who isn’t afraid to take uncomfortable risks.

I don’t wait for the crowd, and I certainly don’t wait for every uncertainty to be de-risked. I like to strike before the herd notices. Sometimes that means having to be satisfied with being comfortable with partial information.

I’ve always approached investing with a glass-half-full mindset. Lots of investors, particularly microcap investors, take the opposite approach. They view every management team with suspicion and each company as “guilty until proven innocent.” And while that mindset can help avoid landmines, it can also keep you on the sidelines far too long, especially in microcap land, where perception gaps create the very mispricings we aim to exploit.

My approach has been to trust selectively. I’m not saying I blindly believe every CEO or jump on every turnaround.

But over time, if you develop a process that puts you in a pool of companies where management teams are more likely to be credible and where upside potential far outweighs the downside, you can substantially improve your odds of success. I use a 10-point quality checklist.

Don’t get me wrong, being a first mover has also been why I’ve taken some really big losses.

However, if your process gets you to a 50% success rate, you don’t need to be perfect. The multibagger wins will make up for the early, imperfect calls. If you start betting 70% or more, things start getting really special.

This willingness to get in before the market is a first-mover advantage I’ve used again and again. It doesn’t always work, but it works often enough to matter.

Now, please don’t take my first mover mantra out of context. You’ve heard me talk about how I’ve seen value in momentum investing. By definition that means the crowd may be arriving. You might see this as counter to what I’m saying in this post. However, if you know me, I’ve always stated that there are many ways to structure a portfolio. Making some “before the 52-week new high” crowd picks is just one of many strategies I use to make investing fun.

Now let’s look at the first mover advantage decision from the lens of conviction.

The Tradeoff: Conviction vs. Downside Protection

Let me give you a real-world illustration.

Imagine two stocks:

• Stock A: A pretty average business. No real edge. But the stock is trading near cash and tangible book value. So, your downside risk is limited. You’re not excited, but they catch a break, like a rising tide lifts all boats industry tailwinds shift. Let’s also assume that the product was already used in this industry a few years ago when the industry use case wasn’t as hot, so the use case didn’t really gain momentum.

• Stock B: A much more exciting product line-up. A high-conviction business model with a clear, proven, and differentiated product that could be used in a new industry, but where it has not been “sold into” yet. So, there’s product acceptance risk. The company also has a weaker balance sheet with downside risk that’s not clear.

Now let’s say both companies are waiting on contract wins that could dramatically change their trajectories.

What do you do?

Well, this actually happened. Stock A is FTEK. Stock B is TGEN. Both stocks are up nicely since being added to our microcap quality index, up 70% and 1,022%, respectively.

As you know, through our research that we have been sharing, they are now both positioned to potentially materially benefit from data center growth tailwinds.

Even though I have a higher conviction in TGEN’s products and long-term potential, I took a bigger out of the gate position in FTEK, compared to nimbly building a substantial position in TGEN.

Why?

Because of the downside clarity.

At around $1.50, FTEK was trading near cash and tangible book. If things didn’t work out, I had a cushion. When TGEN was under $1.00, I had less visibility on what “wrong” would look like. So, even though TGEN upside felt stronger, and potentially more sustainable, due to the competitive positioning of its data center solutions, the downside was less defined.

Furthermore, as we reported, FTEK already proved that it can win a data center project with a hyper scaler back in 2018.

Sometimes conviction isn’t just about how good something could be. It’s also about how bad it won’t get.

It’s not often that you get the opportunity to make bets in microcap land, where you know your downside.

So sometimes, the bigger bet isn’t the one with the better story, it’s the one with the clearer floor.

And that’s why being a first mover doesn’t mean being reckless. It depends on the situation.

I would suggest that instead of asking yourself: “Should I or should I not take a position?”… size your bets according to the information. Don’t get scared from taking some kind of position in a stock where you see some amazing gains potential if things work out.