Big Cap vs Small Cap Investing

This discussion on small cap investing was picked up form the Wallstraits Forum.

To a certain extend, I agreed that there are highers risks associated with small caps without long track records, that are obscure and unknown names. However, I believe each stock has to be assessed on its own merits. All great companies would have started small and grown over time to become great. Basically, it is the business fundamentals and management of the companies that can help leap the companies to greater heights.

From my personal investment, some examples:

(1) Small cap that have growth to great heights and remained there are: Total Automation, CSE, Celestial Goodpack, Vicom & Unisteel.
- Great business fundamentals, monopolistic-like business, leader in the industry

(2) Small cap that experienced highs and lows: ASJ, HTL, Taisin, CG Tech, Fibrechem
- Cyclical business trends, high volume-low margin busines, depending on industry trend, affected by volatile raw material prices

(3) Small cap that decline: Bright Orient, Global Test, JEL, Unifood, QAF, New Toyo, Swing Media
- Little product differentiation, high volume-low margin busines, compete on costs, cyclical business trends

Group 2 & 3 types are similar in characteristics.

Nevertheless, the discussion below is still a good reference.

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Kelinao
Junior Member

Post: #1WS8 Portfolio - long term performance

If WS held its major holdings until now, how about its performance?

Current major holdings:
(stock - bought/latest price, change)
1. Dayen - 0.60 / 0.14, -77%
2. China PowerPlus - 0.26 / 0.13, -50%
3. Sunray - 0.06 / 0.045, -25%


Previous major holdings:
(stock - bought/latest price, change)
1. Unifood - 0.50(adjust) / 0.13, -74%
2. JEL - 0.20(adjust) / 0.05, -75%
3. Sunray - 0.25 / 0.045, -82%
4. OSIM - 0.20(adjusted) / 0.28, 6-year gain +40%(sold too early, good decision)
5. Celestial - 0.35 / 0.755, 4-year gain +114% (sold too early, bad decision)
6. Unisteel - sold too early, poor decision
7. Asia Power - 0.36 / 0.21, -41%
8. BeautyChina - bought 0.50, now 0.51
9. China Paper - bought then sold very quick
........................

Munger
Junior Member



Post: #3RE: WS8 Portfolio - long term performance

Warren Buffett says " An investor needs to do very few things right as long as he avoids big mistakes ".

In the stocks above, investors who pick them are trying to be a bit too clever. You may be thinking that these are value stocks after you go over them with the usual tenets of value investing. You may find that they qualify on every counts and like WS8, they passed with flying colours on all their 8 tenets.

However, investors fail to realise that all the above companies do not have a long term track record. Most of the companies above do not really ring a bell with the laymen before they were listed. After they were listed, only stock markets followers heard of these companies.

Claims that these are value stocks and are undiscovered gems were simply illusions.
Many of these companies above ( and many on the SGX or Catalist ) are simply not going to be good investments. For short to medium term punting, yes. But to own like a business ? No !! You will probably make some money if you just buy and sell them.
And with Chinese stocks, you add another level of uncertainties with corporate governance. You do not even know if you can trust those numbers and those stories that management put out.

If you data mine hard enough through all the 850-900 stocks you will find many of these stocks with IMPRESSIVE numbers and TALL stories. But why need to go through all the trouble looking through all those stocks with funny sounding names ? Even with so called familiar name like Osim, you will still think many times . What is its competitive advantage ? Did you go through their numbers ? Not just the impressive numbers , but the meaning behind the numbers.

From 2002 to 2005, one can buy good companies at very cheap prices. Not just unusual names but names that we know well with managements of integrity. Just do a check on the prices of the following stocks like Keppel, Sembcorp, FNN ,Capitalmall ( new name but we knew the maangement/parent ), SGX, CityDev, Singland, Singtel and a few more.
Even if you managed to pick 3 to 5 of these companies and put ALL your cash in them from 2002 to 2005 and reinvest all the dividends in them and even continue to put money in them ....up to a point when they are no longer termed attractive....you are still ahead today, despite the more than 20 percent correction in our stock market. You need not have sold them , just dont buy them when the margin of safety is not there. How does one know ?

If one is a ' margin of safety ' type of investor , one would . One who knows when not to buy when it is no longer " cheap " , I dont mean one knows that the stock market is going to crash. Of course one will do much better if one sells everything near/at the top. But not many are so clever. The beautiful thing is, one need not be so clever. There's never any need to sell at the top. You just dont buy them when there is no ' margin of safety '.

The mistakes with many so called value investors is that they data mine and pick some unknown obscure stocks and think they they have found some great businesses. I am afraid that most investors will be disappointed by how most of these picks never fulfill their so call potentials. Many are simply ugly ducklings that will never turn to swans. They are never swans in the first place. Some of these stocks move up during the bull run but crash back to where they started from. All this while not paying or paying very little dividends. So these value investors may feel that all that they learn and practice are wrong. Some will point out the mistakes of these investors to show this method is wrong. But it is not the method thats at fault but the practitioners themselves.

In fact investors just need to pick a few tried and trusted busineses when they are available at a great price. Put plenty of money in them and stick with them. And if you have picked them correctly, your job is almost done. If you have picked those trusted names when they were selling at a discount, the dividends they pay today may range from 10% to 50% of your initial buying price and maybe 5 to 20% of your average price. And over the last few years, dividends collected and reinvested ( thus generating new dividends ) can be more than 100% of the initial investments. So, even today, in a bear market, the dividends these investors collect in a single year can beat what many other investors make during the last phase of the bull run.

But many so called value investors try too hard, when what they are looking for are just in front of them. They pick some obscure names instead of trusted names. Some manage to see whats in front but never have the conviction to put ALL ( I do not mean margin or contra ) but only invest in drips and drabs. The opportunity is thus lost when you just put in 3,5, or 8 percent of your available funds. But your available funds are probably 30 to 50 percent of your total net worth as many have residential properties. This means many invest less than 5 percent of thier net worth. And when the next cycle comes around , the same mistakes are repeated. Worse, many bought too little and sell too soon. Two mistakes in this instance, not one. Many times you read in the papers on Sunday when investors sounded impressive by recounting their best investments...85 pct, 135 pct or 200 pct in this stock, in that stock......but most of the time their so called BEST investmnets is only 1 to 2 pct of their actual net worth !!! At times even less.

I sounded like I am against small caps, unproven companies. On the contrary, I am not. I own small caps but I do not datamine and buy a chunk of small caps. Just a couple but buy a lot and keep adding. I buy them when the big caps are not cheap ( not price wise but valuation wise as $18 can still be cheap and 1 cent can be ridiculously expensive ) anymore. But you have to do much more work. You must be really good at reading between the lines when checking their financial statements. You have to check their businesses from time to time. Like visiting the shops, checking the supermarkets, talking to suppliers,vendors, employees……always kicking those the tyres.

One forumer here is very good at doing both. You will notice that he almost always stick to local companies, where corporate governance is less of an issue ( I say less not NO, but because these companies are here, we can weed out those we think are suspect ). These local small caps can also be checked upon easily. I don’t think he has recommended too many CHINA type of stocks. In fact he had warned forumers many times of companies with dubious managements.

So investing is simple but not easy. Picking a good business, buy a lot at a low price and hold on to it for dear life is not easy. Few can do ALL 3 of the above. And yes it can be done in Singapore with Singapore stocks. Not some of those funny names but those names that have been around for a long time. It is much simpler.
Finding a Raffles Education is beyond me but fortunately there are many familiar names. And over the years, they are available at discounts from time to time.

Please note that this is NOT to critisize other investing methods or to convince others to switch to the simple way of investing.
Rather , I am preeching to those new converts like Musicwhiz. To encourage them that it CAN be done here and there's nothing wrong with this method.