Although they should never make up more than a portion of your portfolio, small riskier investments can really boost your profits. My rule of thumb is that while well chosen long-term investments are likely to beat the market (with relatively low risk), a little bit of risk taking can lead to market-thumping returns.
For example, I first noticed Global Health Limited (ASX: GLH) when shares where trading at around four cents. I liked the idea of providing electronic medical record systems to hospitals, psychologists, and psychiatrists, but the company had a long history of losing money. The cashflow was nonetheless improving, and when the company subsequently announced an upbeat profit forecast, I became satisfied with the risk/reward split on offer. I began buying shares at 23.5c, and I'm now sitting on gains of well over 100% in less than a year. For that reason, I think it's worth keeping prospective speculative stocks on your watchlist.
ICSGlobal Ltd (ASX: ICS) is another tiny company with improving fortunes. It owns a medical billing company that manages billing for a variety of healthcare specialists. Its main competition is supposedly, "the incumbent secretary or practice manager who currently do the billing for the specialist." Its core competency is collecting debts from patients, and the company aims to do so more efficiently than medical secretaries. With no debt, a reasonable growth trajectory and consistent cashflow, I think the company is a reasonably low-risk microcap, only really speculative because of its size.
A promising but slightly higher risk play is Antaria Limited (ASX: ANO), a company that manufactures zinc oxide, the UV blocker in sunscreens and some cosmetics, and Alumina, a powdery substance used in cosmetics. The company has recently reported a small positive operating cashflow, despite facing a recent setback when a distributor decided to reduce inventory. The cash balance is a bit low for my liking (there is a possibility of capital raising), but the managing director Rade Dudurovic has been buying shares on market. So too has substantial shareholder Lev Mizikovsky, the founder (and major shareholder) of Tamawood Limited (ASX: TWD). The long-term angle I like about Antaria is that it can provide multiple brands with raw ingredients (and the dangers of skin cancer are well known). The long-term risk is that sunscreen and cosmetic manufacturers stop using nano-particles as UV blockers.
If you're looking for a safer option, I think Nearmap Limited (ASX: NEA) is well worth consideration, though it is (justifiably) more expensive. The company is still a bit speculative because it made a loss in FY 2012 and FY 2013. However, that was mainly as a result of legacy issues with the previous IP licensing business and the fact that the company had not yet begun charging user fees for its aerial images. It reported a modest profit in the first half of FY 2014, and boasts partnerships with serious internationals such as Google Inc (NASDAQ: GOOG) and Amazon.com Inc (NASDAQ: AMZN).
Another small company that I like is funds manager Australian Ethical Investment Limited (ASX: AEF). I have the impression the company is not taking full advantage of its brand though and it could improve marketing and communications by all reports. On the other hand, its investments have performed reasonably well, in particular its Small Companies superannuation fund, which has averaged 9.1% p.a. over the last 10 years and its Small Companies trust, boasting over 10% p.a. for 10 years. If the company can only emphasise the fact that its investments are considerably more ethical than the "ethical" option offered by most funds, it should be able to grow funds under management strongly. This is particularly true because young professionals increasingly support divestment campaigns, and younger investors will be contributing to superannuation for a long time to come.
