How You can Earn Superior Investment Returns by Tapping into this Largely Untapped Area!
Small but mighty. We often hear this said about people who are petite. That just because they aren’t tall(er) doesn’t mean they aren’t as cool!
But, guess what?
It’s exactly the same when it comes to the stock market.
Investors love those big mega caps.
They can’t get enough of them and nor can the research analysts — the people paid to actually delve into these companies.
After all, the analysts the ones who produce the buy/sell memos and the more well-known a company is, well — you can bet the more they’ll be covering it!
These are your Apples and your Microsofts. It’s the big guys.
They’re the ones that always get all the attention.
Why bother covering a tiny company no one’s even heard of — let alone invested in, right?!
Mega caps are also super liquid (aka you can buy/sell quickly and cheaply) plus they have way higher trading volumes than, say, your small caps.
This means you’re able to buy a whole lot of a mega cap stock before you actually alter its share price.
But for small caps, the reality ain’t quite the same.
You get to trade a far thinner volume and they aren’t nearly as liquid as the bigger ones. It all costs more.
It’s the big guys that grab all the attention
Most people wanna know what’s going on with the big caps.
You read about Big Tech, like Meta — along with their layoffs; 10% of whom have already fired. Lol so much for them being “metamates”.
Tesla, Apple, Google, you name it. They’re the ones that get all the page space.
It dominates the media.
Not the obscure small caps. You’ll hardly ever read about that in the news.
This is why there’s hardly any sell-side analysts (those who produce reports why investors should sell a stock) since there’s not much incentive to since so few hold the stock to begin with!
Let’s not forget that small caps are riskier so more people tend to hold less of this stuff in general.
And hold more of the less risky stuff — your mega caps.
All of this means that when it comes to investing, the small caps don’t get nearly as much as attention as the rest.
This is why it can be extremely lucrative for fund managers to focus on these smaller companies
The companies that don’t quite get all that attention and buzz now but hopefully will get loads of it later on.
They’re basically searching for gold in places people aren’t even looking in.
Bigger chance of success.
The big caps are so saturated.
They’re frankly overcrowded making it 10X harder for managers outperform.
But when it comes to small caps, since they’re not nearly as researched, it’s very possible to generate outperformance.
And I quite like the idea of investing into companies that aren’t widely covered.
The small cap universe is filled with all sorts of names you’ve probably never heard of!
And that’s a good thing.
It means you’re investing in areas that others aren’t.
And you know what I’m gonna say — the less crowded, the better!
Active fellas….
When it comes to investing in small caps I don’t invest via a passive route for the exact reason that small caps, as an industry, is not that widely covered.
So, I happily place my faith in fund managers to do all the hard work and find the gems hidden among the thousands and thousands of duds.
There are times when active investing is better — like investing in emerging markets, small caps and during bear markets.
And there are times when passive investing is a whole lot better — for global stocks and mega caps.
Passive vs active
It’s not one or the other. You can have both.
Because, in my mind, they serve very different purposes.
So, mix and match.
And watch your diversification soar.
Because diversification is as much about investing into different areas as it is using different investment styles.
Every mega cap out there started out as a small cap.
Every Apple began as something far, far smaller.
And this is what small cap fund managers are looking for. The next growth story. The next Apple. The next Tesla.
And you certainly aren’t gonna find it in the land of the big and mighty.
They’ve grown.
They’ve delivered stunning share price returns.
And now they’re stable, solid and sound companies.
But they’re not your whopper growth stuff.
I met with the owner of a fund management house that focuses on small caps.
I watched a webinar he deliverd and was eager to pick his brains. And guess what — he let me!
What I’ve learnt is that if you don’t ask, you don’t get.
We got talking about all sorts of things in investing land and he was telling me how small cap research is a really intensive area.
Basically not for the light-hearted.
His company also has happens to have one of the largest small cap research teams and their analysts know their sectors like the back of their hand.
And this is exactly why it can sometimes really pay off to splash your toes in small cap waters.
They’re unchartered but that’s what makes them really exciting, for me anyway!
The perfect antidote for inflation
The really snazzy thing about small caps is that these tend to be businesses that are extremely niche so they’re more able to raise prices.
Much easier than say, a bog-standard supermarket is which is why their consumers will very often keep coming back!
Despite price hikes.
And it’s exactly this pricing power that makes small caps a great addition to any portfolio as it will give you some sort of inflation protection — we need it!
Think of it as a handy-dandy handbag umbrella that fits anywhere. Perfect for that rainy day.
When inflation is super high, in the double-digits (what we’ve got on now) small caps might not perform as well as if inflation were a little less-high!
If these companies have the potential to grow their earnings by five or even ten times over the coming years then wherever inflation travels to, it isn’t really a big deal.
And frankly won’t really matter.
So, while you’ve probably made a ton of room in your portfolio for the Big Guys don’t neglect the Little Guy.
Small is beautiful. And mighty.
Disclaimer: This is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
This article has been published on my personal website: https://kneadyourdough.uk/
