The big money or the sure money - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

The big money or the sure money

Sep 23, 2008

The debate is perhaps as old as the stock markets themselves and it goes something like this, "In order to outperform the markets over a sustained period of time, should one stay invested in small/medium caps (SMCs) or stick to only large caps?" The battle lines have already been drawn. On one side are the supporters of SMCs who swear by their ability to throw up a few multibaggers every now and then. While on the other side are the supporters of large caps where the chances of a permanent loss of capital stand reduced to a great extent. On the flip side, SMCs can make you lose tons of money while one is seldom likely to unearth a multi bagger from the universe of large caps.

  • Also read: Small caps: How have they performed?

    United they fall...
    As far as aggregate performance is concerned and if the history of the last five years is any indication, don't even think of investing in SMCs. This is because the out performance of the small cap index is so small that it does not even cover the higher risk that an investor takes while investing in these companies. Infact, the other index i.e. the mid cap index has actually underperformed the large cap index between Dec 2003 and now. Thus, on an aggregate basis, SMC indices are not the indices of first choice from a long-term perspective.

    ....and divided some stand tall
    Now the question that begs itself is, what about taking a bottom up approach and investing on a case-by-case basis? Our answer to this query would be the ever so diplomatic 'IT DEPENDS'. And it really does depend on a few things. The most critical would be one's circle of competence. If a person is a passive investor and his idea of research is weekend reading, then we believe he is better off sticking to large caps. This is because unlike SMCs, where the companies need to be thoroughly researched, large caps already come with equipped with proven business models and management. Hence, the chances of going wrong on these parameters stand reduced to a great extent. What only remains to be done is understanding the business model thoroughly and checking whether the large cap is available at a reasonable valuation. Furthermore, if entered into at decent valuations, the chances of 30%-40% downside are a lot less in large caps as compared to SMCs.

    SMCs on the other hand mostly come equipped with untested management and if it's a technologically inclined company, then the products might also be difficult to comprehend for an average investor. Thus, in order to unearth the next multi bagger from this universe, one needs to have a very good feel of qualitative parameters like the caliber of management and also the market potential of the products. Please bear in mind that for every 'Infosys' or a 'Google' there have been hundreds of other wannabes. The key is to have the ability to differentiate the men from the boys.

    Now a word or two on the returns. It should be obvious to anyone that if successful, SMCs can grow at a much faster rate than the large caps for long-periods of time thus leading to a concomitant rise in market values. However, betting on the wrong horse could lead to equally devastating results on the downside. Although this pitfall is eliminated in large caps, they more or less come with a limited upside unless bought at dirt-cheap valuations.

    Conclusion
    To conclude, there have been both success stories as well as huge failures in both the cases. The key is to identify one's circle of competence and invest accordingly. Investment legend, Warren Buffett had summed it best when he said, "The really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions."

  • Also read: Lessons from Warren Buffett


  •   

    More Views on News

    What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

    Sep 18, 2020

    Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

    Sundaram Bluechip Fund: Will Hold the Stable Horses (Outside View)

    Sep 18, 2020

    PersonalFn briefly outlines the newly launched NFO note HSBC Corporate Bond Fund.

    Wait! Don't Chase Smallcaps Now (Profit Hunter)

    Sep 18, 2020

    Let the markets take a breather before you jump in.

    How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

    Sep 17, 2020

    In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...

    A Contrarian View on Whether You Should Load Up on Small Caps podcast (Views On News)

    Sep 17, 2020

    Rahul Shah discusses whether the SEBI circular is the perfect time to start investing in good quality small caps

    More Views on News

    Most Popular

    Investing in Share Market

    Looking for investing in share market A few things you must know about share market and different ways of investing in the s...

    How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

    Sep 11, 2020

    This is how you can apply the greed and fear cycle in the market to pick stocks.

    I Recommended this Stock over Page Industries because it's Relevant to Doubling Your Income (Profit Hunter)

    Sep 7, 2020

    Things are not often what they seem in the market and how you can take advantage of this.

    The NASDAQ Whale Could Harm Your Portfolio (Fast Profits Daily)

    Sep 7, 2020

    The discovery of Softbank pushing up prices on the NASDAQ will cause volatility in the market. Stay alert!

    This Could Be the Best September for Auto Stocks (Profit Hunter)

    Sep 11, 2020

    Here's why I think this month could be a great for auto stocks.

    More

    Covid-19 Proof
    Multibagger Stocks

    Covid19 Proof Multibaggers
    Get this special report, authored by Equitymaster's top analysts now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Sep 18, 2020 (Close)

    MARKET STATS