Good luck getting Tim Cook, CEO of Apple Inc. I can call the CEO of a small company I am invested in, and he’ll be happy to explain how a newly announced contract impacts his business. If you like to have personal contact with company management during the research process, you will often find that the smaller the company, the more accessible management will likely be. Other great investors like Guy Spier have said that they shy away from personal contact with senior management because of their fear of becoming influenced by charismatic personalities. You can read more about his tips on interviewing management here and here. GeoInvesting co-Founder Maj Soueidan stresses the importance of management interviews, and has developed an intuitive interview technique over a long investing career. During that due diligence process, personal contact can be an enormously helpful tool.
#MICRO CAP STOCKS DRIVER#
If you subscribe to the idea that management is a main driver of company value, you certainly want to perform due diligence on the management teams you invest in. You might argue that in small companies the quality of management is of even greater importance. Many great investors, including Warren Buffett, stress the importance of investing in companies run by quality management teams.
More importantly, I can better gauge how much randomness exists in the business. I feel I can make long-term predictions on a business level with a higher degree of confidence if I understand the moving pieces. The future is always uncertain and quarter-to-quarter results can be very volatile in microcap stocks. I don’t mean to say that there is anything close to certainty in small stocks. In fact, I deem many of the big cap companies to be too complex to be thoroughly understood and wonder about analysts making forecasts to the third decimal. I can understand a small business with two product lines, two main distributors, and maybe three important suppliers.Ĭan I get a truly realistic understanding of Goldman Sachs’ derivative book, and all the other moving parts of this business? I don’t think I can, and I seriously question the people who claim they can (especially those that claim high or absolute certainty). Something small and simple is inherently easier to understand than something big and complex. You want to understand what is going on in the business and the moving pieces that make it tick. If you are a fundamental investor, you want to know what you own. I don’t mean to discriminate between smallcaps (market cap 300m - 1bn), microcap stocks (market cap between 50m and 300m), and nanocaps (market cap sub 50m), but I want to lay out general intuitions for why small public companies can offer attractive investment opportunities, and why smaller is often better. After all, some of the best investors of all time, including Warren Buffett, Peter Lynch, Joel Greenblatt, and many others started their careers investing in microcap stocks and enjoyed the best returns when they were pursuing opportunities in small capitalized companies. The Buffett quote does not directly imply that you should invest in microcap stocks, but the structural advantage that Buffett mentions can be very well played in smallcap and microcap stocks.
I think I could make you 50% a year on $1 million. It’s a huge structural advantage not to have a lot of money. You ought to see the numbers. But I was investing peanuts then. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. “If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Randomly picked portfolios can have 50% up-years, but I infer from Buffett’s statement that 50% is his average return expectation. What would cause the normally conservative Warren Buffett to make such a statement? Is it simply that he knew he would never actually have to prove it, or are there important intuitions to be gained from this quote? Understand that a 50% return in any given year, be it in microcap stocks or larger caps, should mean nothing to you if you accept the randomness involved in short-term investment performance. When I read the following Warren Buffett quote for the first time it struck me as peculiar.
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