So you want a roller-coaster ride of epic proportions, and you're already sick of the best that Sandusky, Ohio, can muster? No problem -- buy some micro-cap stocks, preferably in thinly traded papers of controversial companies in an easily misunderstood industry. It also helps if it's Chinese. Then buckle up for the thrill ride of your life!

I am Iron Man
If that sounds like great fun, I must commend you on having guts of cast iron and titanium. These crazy rides can make you rich, but they can also crash hard and never recover. Many of them are said to be frauds. Sometimes that's just a ploy to juice short-sale returns, and there's no long-term harm done. But sometimes it's true.

Last week, I covered the quarterly results of video-game equipment specialist Mad Catz Interactive (AMEX: MCZ). The results were good, maybe even great, but the stock took a nosedive anyway. Mad Catz fits the roller-coaster profile almost to a T: it's small, thinly traded, heavily shorted, and attached to the broader video-game industry in an oft-misunderstood auxiliary manner. Move the headquarters to Beijing, and you'd have the perfect storm.

An intrepid reader wanted to understand the counterintuitive stock move, so I dug a bit deeper. Allow myself to quote … myself:

Expectations can run wild, especially since neither management nor analysts like to set quarterly targets for sales and earnings. That also means we have to guess what other investors really wanted to see -- our only evidence lies in the chart squiggles.

Treat this as a buy-in opportunity on a highly volatile stock (beta: 2.15) and you'll be fine.

The stock has declined from its highs, and it's a serious difference. But that's kind of life in the world of high-volatility investing, of which Mad Catz is a fine example. It's a micro-cap trading on the AMEX, and Reuters can't find a single analyst with an opinion of the stock one way or the other. Moreover, only 4% of shares are owned by insiders and 5% by institutions -- lots of individual investors are driving the fairly high daily dollar volumes.

And doubling or tripling profits can happen when you're working this close to breakeven -- percentage comparisons year over year can get ridiculous, and then investors get used to silly numbers that can't last.

Lots of guesswork involved and very little handholding along the way. Like I said, enjoy the entry point while it lasts and then either jump off at the next crazy peak or hold on for a wild long-term ride.

I think that's a useful framework for thinking about high-beta micro caps in general. Boil it all the way down to the essentials, and the simple rule of thumb becomes this: The smaller the stock, the less its chart squiggles have to do with business performance.

High beta, high swings
A high beta value is often a dead giveaway that it's time to reach for the antacids before investing. Consider these thrill rides.

Stock

52-Week Low

52-Week High

Top-to-Bottom Difference

Beta

Biolase Technology (Nasdaq: BLTI) $0.61 $6.92 1,034% 3.5
AgFeed Industries (Nasdaq: FEED) $1.00 $3.44 244% 3.2
PMI Group (NYSE: PMI) $1.01 $4.68 363% 3.6
Sify Technologies (Nasdaq: SIFY) $1.18 $8.54 624% 3.6
Cell Therapeutics (Nasdaq: CTIC) $1.26 $3.30 162% 6.3

Data from Yahoo! Finance.

Some of these wild swings make sense: PMI Group is still suffering from the mortgage disaster of 2008 because it's paying out insurance claims on bad loans. But most of the rides defy all logic.

Indian Internet service provider Sify seems to crash or soar whenever far-Eastern online businesses are in the spotlight for any reason. The news rarely affects Sify itself, or even its immediate operating environment. Investors don't seem to separate the premium performers from less distinguished competitors -- at least not on a day-to-day basis.

AgFeed falls into the same category. It's a tiny, thinly traded Chinese operator in a rarely researched market sector. Lots of shorts and lots of shares owned by individual investors? Checkity-check. All aboard -- wild rides ahead!

Biolase and Cell Therapeutics march to a somewhat different drummer, depending on hard data such as FDA approvals or failed product tests for their survival and success. But they still fall prey to the tiny-cap volatility virus and often jump hard one way or another on fairly insignificant news.

For the record, actual roller-coaster guru Cedar Fair (NYSE: FUN) happens to be a fairly small, thinly traded stock but sports a less outrageous beta of 1.17 and a mere 106% swing between yearly lows and highs. That's not a whole lot more exciting than the 36% price ride and term-defining 1.0 beta of the S&P 500.

OK, but how does that help me?
In a completely rational market, these crazy price swings would be a lot milder. Has Biolase's intrinsic value really fluctuated by more than 1,000% in a 12-month period? Of course not. Whether it's market manipulation or uninformed gamblers at play, the market is populated by lots of forces that push stock prices out of the realm of logic.

So if you know a company well enough, you'll be able to separate the baseless drops from the deserved dumpings and act accordingly. Conversely, you'll know when a sky-high jump means big things happening -- or a signal to take your profits and walk away.

Our new My Watchlist service is designed to help you stay informed and poised to take action. Get started today with a batch of crazy micro caps:

Fool contributor Anders Bylund holds no position in any company mentioned. Check out his holdings and a short bio. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.