Large caps, a waste of time?

[Plasmo]

If I had a large sum of money and wanted a fairly low risk decent return on it, I'd buy the ASX200.

But to be honest, the returns in general seem to be pretty mediocre compared to what small caps have to offer.

I entered the market thinking I'd buy 50% large caps with decent dividends to collect a consistent payment, and then back high growth small caps with the rest of it for potentially great gains. And now it feels like 50% of my capital is just tied up in something slow and cumbersome.

I guess part of it is impatience, I don't think I'd be satisfied with 10% or 12% year on year returns, I'm after at least 30%, and part of it is a feeling of futility. With dozens of full time analysts covering the largest stocks, I don't really see any prospect of beating them at their own game except by forecasting broad economic trends.

 

[wayneL]

If I had a large sum of money and wanted a fairly low risk decent return on it, I'd buy the ASX200.

But to be honest, the returns in general seem to be pretty mediocre compared to what small caps have to offer.

I entered the market thinking I'd buy 50% large caps with decent dividends to collect a consistent payment, and then back high growth small caps with the rest of it for potentially great gains. And now it feels like 50% of my capital is just tied up in something slow and cumbersome.

I guess part of it is impatience, I don't think I'd be satisfied with 10% or 12% year on year returns, I'm after at least 30%, and part of it is a feeling of futility. With dozens of full time analysts covering the largest stocks, I don't really see any prospect of beating them at their own game except by forecasting broad economic trends.

Think in terms of risk versus reward. As a rule of thumb, the small caps have higher potential reward, but commensurately higher risk.

You can crank up the potential rewards (and risk) with leverage, but risk control become more critical. With some types of leverage, you can blow past zero with relative ease (say a nasty gap, delisting, or whatever)... which is why I like options.

(with the feeling, having read the other thread, that I have been led into an ambush. )

 

[reece55]

I guess part of it is impatience, I don't think I'd be satisfied with 10% or 12% year on year returns, I'm after at least 30%........

Jeez mate, you are being a little bit aggressive here don't you think!!!!

I can tell you that if my super could return 10 - 12% in perpetuity, I would be extremely happy personally........ 11% to the power of 30 isn't a bad return if the risk free rate is 5- 7%......

Small caps have generated better overall returns in recent history, but they can also do the opposite depending on your selection. I suspect in the next couple of years, the small caps are going to underperform (on average) the large caps, because of risk aversion.

All the best with getting 30% though, I would say in this market it's going to be a very difficult task, large or small....

Cheers

 

[Trembling Hand]

Small caps have generated better overall returns in recent history, but they can also do the opposite depending on your selection. I suspect in the next couple of years, the small caps are going to underperform (on average) the large caps, because of risk aversion.

Reece have they? A select few go straight to the moon sure but that is deceiving. I think for every one that goes from $0.20 to $3 there are 30 that go from $0.20 to $0.02.

Haven't done a back test on the stats, may do one through the week, but the 10 baggers are there to suck the punters in, like this dude, in casing the home runs. Just saying small caps out perform is not the whole story how do you catch the 1 in 30 and not end up wasting your time in the crap small caps.

 

[prawn_86]

TH,

Not sure about the entire overall market, but small cap funds and indexes to tend to outperform in both directions.

Obviously these funds and indexes have slection criteria though, same as any other index...

 

[reece55]

Reece have they? A select few go straight to the moon sure but that is deceiving. I think for every one that goes from $0.20 to $3 there are 30 that go from $0.20 to $0.02.

Haven't done a back test on the stats, may do one through the week, but the 10 baggers are there to suck the punters in, like this dude, in casing the home runs. Just saying small caps out perform is not the whole story how do you catch the 1 in 30 and not end up wasting your time in the crap small caps.

Just going by the small caps index was my point and say the Russell 3000 in the US, but totally take your point here TH....... Specifically in the exploration mining game, companies quite literally simply spend all their dough without ever finding a speckle of appropriate dirt..... Unless you have taken and held a slice in all these entities, you are likely to end up blowing your money...

It would be interesting to say be short in these kinds of stocks with a CFD provider 24/7??????? Diversified shorting... HAHAHAHAHA.....

Cheers

 

[Trembling Hand]

TH,

Not sure about the entire overall market, but small cap funds and indexes to tend to outperform in both directions.

Obviously these funds and indexes have slection criteria though, same as any other index...

Yeah but that is because a couple of the small caps grow into big caps and take over the index. 95%(guess) go nowhere but down. With any index you should start off with the assumption that they are dominated buy the top 20% and the bottom 40% don't even matter.

Now if you buy a index fund thats fine your pooled money is spread around but if your trying to catch the top 20% its the same game whether your playing in the penny stocks or big caps.

 

[Plasmo]

I would never buy a small cap index, there are way too many companies in there that anyone can see are completely garbage simply by looking at their balance sheet, precariously held aloft by debt, relying on a bonanza mineral discovery or some other fantasy.

IMO the obviously awful ones drag down the whole index and are easily avoidable.

Whereas if you look at the top 50, 100 or 200 stocks, you can hardly filter out any which are total trash (except something like ABC, Allco or Centro, but then they may still perform reasonably because they were bid down so hard as soon as their awfulness was revealed anyway)

 

[reece55]

I would never buy a small cap index, there are way too many companies in there that anyone can see are completely garbage simply by looking at their balance sheet, precariously held aloft by debt, relying on a bonanza mineral discovery or some other fantasy.

IMO the obviously awful ones drag down the whole index and are easily avoidable.

Whereas if you look at the top 50, 100 or 200 stocks, you can hardly filter out any which are total trash (except something like ABC, Allco or Centro, but then they may still perform reasonably because they were bid down so hard as soon as their awfulness was revealed anyway)

Plasmo mate, you sound like a expert here.....

What we were pointing out to you was that if you stay in the index, you have a better chance of winning and outperforming than if you pick small cap stocks individually... TH's point is that excluding say a FMG or PDN, 95% of smaller cap stocks do nothing but go backwards..... So, unless you are a market genius, this kind of a strategy is going to inevitably lead to the destruction of your money. Very few have been able to make this (a small cap portfolio) strategy work, Young Trader on here is an except to the rule. But you add a bit of market psychology in the mix, my feeling is you will find it very difficult to hold on to the 2 winners that are required to make this strategy work...

As for obvious about which ones to avoid, financial statements in smaller entities are next to useless, most exploration entities are just cash and trade creditors - the answer won't be there mate....

Cheers

 

[Trembling Hand]

I would never buy a small cap index, there are way too many companies in there that anyone can see are completely garbage simply by looking at their balance sheet, precariously held aloft by debt, relying on a bonanza mineral discovery or some other fantasy.

But that is where the out performance comes from. The Surprises that aren't in the balance sheet.

Whereas if you look at the top 50, 100 or 200 stocks, you can hardly filter out any which are total trash (except something like ABC, Allco or Centro, but then they may still perform reasonably because they were bid down so hard as soon as their awfulness was revealed anyway)

I still think the job is the same, either small mid or large, it looks a lot easier with hindsight.

 

[reece55]

But that is where the out performance comes from. The Surprises that aren't in the balance sheet.



I still think the job is the same, either small mid or large, it looks a lot easier with hindsight.

TH has hit the hammer on the nail here.....

Do yourself a favour Plasmo, look through the Allco thread, there were plenty of people that thought they had picked up a bargain when the stock went down to about $6. These people weren't idiots - it was difficult to decipher the Allco web... Very few picked it, it's much easier with the ability of hindsight as TH says.

Cheers

 

[MRC & Co]

Small caps such as BKL, SDG, JST are relatively "safe" so to speak, at least im my opinion. Well at least as safe as NAB

JBH will be a "small cap" if its SP falls a little.

If you have your stops set, companies like these, with strong branding, cash flows etc, should not get you into too much trouble.

I think some confuse "small caps" with "micro caps".

I personally, gravitate towards small/medium caps (but only a select few, probably have 50 or so on my watchlist).

 

[tech/a]

Well
Just quickly based upon $ value rather than capitalisation.

162 stocks under $1 have increased over 100% in the last 12 mths
Only 1 stock over $10 has done the same. IPL

Of the 1162 stocks under $1---162 represent 13.9%
Of the 151 stocks over $10---1 represents .006%

So there is a strong arguement supporting the pennies.

 

[Wysiwyg]

Slightly off topic but to add some enlightenment ... would anyone be interested in this beautiful arrangement of kitchenware? There is one for all tastes.

 

[prawn_86]

Well
Just quickly based upon $ value rather than capitalisation.

162 stocks under $1 have increased over 100% in the last 12 mths
Only 1 stock over $10 has done the same. IPL

Of the 1162 stocks under $1---162 represent 13.9%
Of the 151 stocks over $10---1 represents .006%

So there is a strong arguement supporting the pennies.

Thats interesting Tech.

Anyway that you could actually get capitalisation data rather than just price?

Although im not aware of any large caps that are under $1. Possibly a few medium caps, but it depends on your definition.

Would you be able to do the % of those over $5 that have doubled? As there are a fair amount of large caps between $5 and $10

 

[gfresh]

Well this will sound textbook, but it's probably not a bad idea to have a mix of all.. the large (ASX50), up and coming (say ASX200 or ASX300 growth stocks), and a few small penny hopefulls. The idea being that your bigger stocks stay relatively stable and make up the majority of your portfolio, hopefully continue growth of a few % a year, as well as give you say 3-5% dividends on top, some of which can be tipped into the medium, or smaller stocks, which have higher growth potential.

Yes, that is a somewhat boring approach, but boring can mean you make slow and steady returns. Expecting or demanding high returns can be a recipe for disaster very often.

If you watch both types during corrections, it's usually your larger stocks that bounce back first, giving you a good barometer of market sentiment (and it usually has more impression if it's actual $ you are seeing changing in your portfolio). After this, usually you'll see some of the smaller stocks to pick up, and it's sometimes a signal that you can experiment with some more risk again, say in those types of stocks.

I think some of the outer ASX200 or 300 stocks are a good pick, as they are often still growing, established in the marketplace, with actual revenue and sales starting to come in. They've moved on from each year to year survival, and looking to cement a place, and move towards the top end of the market.

You can also think of it this way when it comes to the smaller stocks - with proper money management techniques, a 3% loss on a small cap is the same as a 3% loss on a larger company, however the potential for your "profits to run" on a small company provide the greater rewards (10-100%+ in a few months). But you have to be disciplined, small stocks can really hurt you if you hold onto them once the tide has turned.

 

[theasxgorilla]

So there is a strong arguement supporting the pennies.

I think the concept of the idea is to invest in a non-market-cap-weighted fashion. Without knowing where to source the evidence I believe it can be/has been proven that investing in this manner is one simple step toward achieving alpha (lets classify that as outperfoming a market-cap-weighted index).

 

[nizar]

But that is where the out performance comes from. The Surprises that aren't in the balance sheet.

Well said TH.

I have to agree with tech/a on this one.

Nick Radge has also done some work on this (Bang for buck). Its on his website somewhere I think.

 

[nizar]

Well
Just quickly based upon $ value rather than capitalisation.

162 stocks under $1 have increased over 100% in the last 12 mths
Only 1 stock over $10 has done the same. IPL

Of the 1162 stocks under $1---162 represent 13.9%
Of the 151 stocks over $10---1 represents .006%

So there is a strong arguement supporting the pennies.

Just to add to my previous post.

It would be interesting to see how many sub-$1 companies have decreased over 50% in the last 6 months, compared to those over $10.

I think you could potentially make more money from more volatile stocks.
Volatility comes from liquidity (inversely proportional) and this relates to market cap and (generally) price.

So the small caps move more either way. This means UP in a bullmarket like what tech's example shows.

But look at some of the dot.com specs during 2000-2001. The whole Info tech sector actually fell by 94%

 

[wayneL]

Volatility comes from liquidity (inversely proportional) and this relates to market cap and (generally) price.

Eh?

Greater volatility may at times be accompanied by greater volume in an individual spot, but it ain't necessarily so as a general rule of thumb... or are you saying less liquidity = greater volatility?

Either way, I would contest that.

Also, there isn't necessarily a link between trendiness and volatility. There can be great runs on reducing volatility. (see chart)