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Strategies & Market Trends : The Art of Investing

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towerdog

To: Sultan who wrote (6621)	3/5/2023 12:11:32 PM
From: Sun Tzu	2 Recommendations of 10489

He is not wrong, but there are a few very important things that he did not emphasize enough: "10 big winners made up the bulk of their outperformance over 50 years." This part is the key. Research shows that investing in microcap growth stocks (when filtered for certain characteristics) outperforms all other styles. The problem is that you need to cast a very wide net because the failure rate is very high. You cannot be a stock picker with microcaps as it is normally understood because even the good microcap companies that pass all your filters have a high failure rate. Amazon is a very good example. Bezos did everything right, far more than you could expect from other CEOs. Even so, Amazon flirted with bankruptcy for years and many anxious mothers called on their sons to leave the company. Amazon could have easily gone under if the financial conditions had remained tight for another year or if a major competitor had executed better. A big company only needs to execute well to be a rewarding investment. And given that they have achieved big size, they likely know how to execute. A small company needs to execute well under harder conditions and also get lucky. They are like the sea turtle hatchlings crossing the sandy shores into the ocean. 90% don't even make it the deeper waters, let alone survive there. But those that do get lucky, end up living for hundreds of years. This analogy is very applicable to microcaps. BTW, Starbucks is another good example. You should read Pour Your Heart Into It to see what they went through for years before they became the company they are now. It's an enjoyable book. One of the things that improves the odds of small cap success is investing in them just as we come out of a deep recession. The economic down cycle weeds out a lot of microcaps that should not have gone public to begin with (as well as many who were good buy just ran out of resources). These surviving companies then have tailwinds as a new upcycle begins. Also smallcaps do better under tough international conditions but moderate (or just better) domestic conditions. Big multinationals have to contend with the exchange rate and geopolitics. Smallcaps just need to get their domestic business right. It's easier. JMO

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