How 'Virtuous Circles' Bring Maximum Returns Into Your Portfolio

You may have heard the term 'vicious circle'...

When "vicious circle" was first coined in the mid-1800s, it referred to the worst logical fallacy: circular reasoning. It's when an argument's conclusion is also one of its premises.

Over time, the meaning of a vicious circle changed to mean a cascading, bad chain of events that exacerbates itself over time. Take, for instance, the poverty cycle.

People born into poverty typically don't get the same access to education as those with higher means and often get worse jobs out of school. Since their jobs pay less, poor people often spend more time working, making it harder for them to pursue an education, making it harder to find better work, and so on. 

In the mid-1900s, a century later, the need for describing the opposite situation came into play. The term "virtuous circle" was coined, and it's the same concept yet working positively.  

Cyclical phenomena create powerful wealth creation... 

They are powerful and govern so much of what happens in the real world. They arise in economics, sociology, biology... and even my forte, investing. The term virtuous circle has evolved into a virtuous cycle. 

For instance, let's look at microcap stocks. 

These stocks don't get the high-visibility chatter on social media and financial publications that larger companies do and aren't policed as stringently by the Securities and Exchange Commission ("SEC"). 

Microcaps with valuations less than $1 billion are often invisible to hedge funds. Often their covenants or internal rules can't invest in such tiny firms. 

When microcaps are truly good and grow large enough to reach around $800 million in market cap (with sufficient liquidity), these companies begin popping up on the screens of more investors. 

When these firms start to receive attention, it leads to some analyst coverage and media attention... And that can lead to larger investment fund stake-taking. 

In a virtuous cycle, with that added attention, it can lead to sudden explosive growth. Once the microcaps cross $1 billion, they appear on so many more funds' radars. Once these firms cross $2 billion, it's even more so. 

It's a virtuous cycle that feeds on itself positively, leading to five-bagger and 10-bagger returns when you can identify those right businesses poised for the big time. 

It's generally difficult for a $50 billion firm to become a $250 billion firm. There just aren't that many, and every hedge fund is staring at every one of those companies. 

Conversely, $500 million companies skyrocket into $2.5 billion companies incredibly frequently. Some of my best stock-picks and personal investments have been companies that I bought in the microcap range, with less than a billion in market cap. 

It only took a year or more for them to reach the multibillion market cap level and become five-bagger returns. So long as that virtuous cycle kicks in, it's an incredible opportunity. 

Legendary investor and billionaire Warren Buffett was once asked why he no longer looks at microcaps. He said it wasn't because he doesn't like them... it's because he can't invest in them. 

But if Buffett did invest in companies worth less than $1 billion, he thinks he could easily attain 50% annual returns with some diligent fundamental research. He says: 

The universe I can't play in has become more attractive than the universe I can play in. I have to look for elephants... It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that. 

That's some serious alpha... 

Let's think about how the virtuous cycle of microcap growth really works... 

At Altimetry, we identify the right companies, and Uniform Accounting helps us distinguish the best from the rest. 

As the company executes its vision, then its valuation increases. Once a company is larger, it is easier to source capital for further growth on better terms. 

As the company grows, it attracts better employees and partnerships. And once it crosses the $1 billion mark, it lands on the radars of hundreds of hungry hedge funds. 

Hedge fund investments and exchange traded fund additions are then publicized as a vote of confidence for the company, leading to more great talent, higher valuations, and cheaper access to capital. 

That leads to more attention from Wall Street, and before you know it, the CEO is live on Jim Cramer's Mad Money show. 

After all, nearly half of the megacaps today were once microcaps... 

That is a virtuous cycle we want our money to ride with... 

It may be the only place in the equity markets where investors could realistically find 1,000x returns. 

Since launching our Microcap Confidential newsletter, the average return of each recommendation a year later is 123%... including the losing positions. 

That's enough to turn a $10,000 portfolio into $1.2 million within seven years... or an incredible $13.6 million by year 10.

I believe every investor should be reading this research. That's why I just released a brand-new presentation where I gave away all 23 open recommendations – name and ticker symbol – absolutely free. 

This presentation will only be available for the next few days. You don't have to enter an e-mail address, credit card, or phone number. Simply click here to watch it.

All the best, 

Joel