Small caps: more room to grow, more room to fail
Small caps are less researched, which is where opportunity lives. They are also more fragile, which is where the money goes.
Decide whether the extra risk is one you are being paid to take.
How Small caps: more room to grow works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
One investment is the fund
Most go to zero and that is not a failure of selection, it is the shape of the asset class. It is why a venture investor has no use for a company that will merely do quite well.
- 1
The maths of size cuts both ways
A £200m company can plausibly become a £2bn one. A £2 trillion company cannot become a £20 trillion one without exceeding the value of most national economies. Room to grow is real, and it is arithmetic.
- 2
Neglect is the opportunity
Big companies are picked over by thousands of analysts. Small ones may be covered by nobody at all. If an edge exists anywhere in public markets, it is far more likely to be here than in a mega-cap everyone reads daily.
- 3
Fragility is the price
One customer, one product, one factory, one bank facility. A large company survives a bad year; a small one can be finished by it. And the liquidity vanishes exactly when you want out, so the spread you pay to exit can dwarf the return you hoped for.
Check the balance sheet first in a small cap, not last. They fail through the balance sheet far more often than through the income statement.
- 4
Own more of them, and smaller amounts of each
The right response to higher individual failure rates is not to avoid the category, it is to size the positions so that any one of them going to zero is an annoyance rather than an event.
You can name what would kill each small company you own, specifically.
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Small caps are less researched, which is where opportunity lives. They are also more fragile, which is where the money goes.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.