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Long Term Investment - Big Companies vs. Small Companies

ENP

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What sort of companies do you focus you core long term portfolio in, big or small companies. By big I mean market caps in the billions where as small cap I'm meaning under 500 million. e.g. Coca Cola Amatil CCA is big and Tox Free Solutions TOX is small (two of my holdings).

Why do you choose one over the other?

How often do you buy and sell these long term stocks?

Ideally, I'd like to find a small company, invest in it early and hold it until it becomes a big company, but most of the time I've found they grow quickly when they are small and then hit a roof and stop growing.

I'd prefer to invest in bigger companies but not sure if they have the same returns as a good mix of smaller ones?
 
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most of the time I've found they grow quickly when they are small and then hit a roof and stop growing.

I'd prefer to invest in bigger companies but not sure if they have the same returns as a good mix of smaller ones?
Yes, this is true - it's very rare to find large companies growing quickly. I would reframe your investing approach - try to find companies with solid financials, future growth prospects, etc etc - Whether or not these are big or small.

In my (limited) experience, by far the majority of those companies will end up being small.

Question: why would you prefer to invest in bigger companies?

Answer to your question - I doubt very much you will see the same growth prospects / 'returns' in large companies as well-chosen small companies. You should also determine where you want your returns to come from (i.e. capital growth, dividends, etc). Growing companies will be less likely to pay out dividends. Grown companies will be less likely to have significant capital growth.
 

ENP

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Question: why would you prefer to invest in bigger companies?
Bigger companies such as Coca Cola Amatil as I mentioned before, have been around for many years, are the market leaders, have a competitive advantage and are very reliable. I guess they help me sleep easier as compared to a smaller company where their future is more uncertain.

Don't invest in something for 10 minutes if you wouldn't invest in it for 10 years.... right?
 
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You won't make very much investing in big caps, but the risk is a fair bit less if you buy quality companies (CCA would fit into this mould imo).

If you're still young and want to grow your capital I'd say that small caps is where you need to be without using options/leverage. With options and leverage you can make big gains anywhere.
 
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If you invest in shares then please consider your SMSF as this can provide you with a tax effective way in investing into a company.

Please contact me if you would like help in how you can look after your portfolio
 
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If you invest in shares then please consider your SMSF as this can provide you with a tax effective way in investing into a company.

Please contact me if you would like help in how you can look after your portfolio
Please contact me if you want gardening advice but what has that to do with this thread.??????????
 
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Bigger companies such as Coca Cola Amatil as I mentioned before, have been around for many years, are the market leaders, have a competitive advantage and are very reliable. I guess they help me sleep easier as compared to a smaller company where their future is more uncertain.
Just because a company is smaller, it doesn't mean it's less certain... Granted CCL is a license to print money, but something like Channel 7 or 9 is far less certain than some of the quality small caps (e.g. TGA, BRG)...
 
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I want to buy larger companies with a competitive advantage but seem to find better value in small caps probably due to less analyst coverage and media attention.
 
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I want to buy larger companies with a competitive advantage but seem to find better value in small caps probably due to less analyst coverage and media attention.
It's hard to get serious compounding in larger caps with a purely domestic focus because they are limited by their size, but over the past year I've gotten pretty decent returns from PPT, COH, CTX and TLS and a pretty flat effort from QBE (despite it's price gyrations I'm about square). It is possible to generate a decent return on large caps, just difficult to repeat it over and over unless they have an international focus.
 

skc

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I think academic studies have shown that small caps over the years, on average, out perform the large blue chips (sorry I can't provide the reference but you might be able to search for something along these lines).

But at the end of the day, you make a good return from your skill and knowledge on the particular sector / companies. So look within yourself and see where the advantage lies for you.

Personally I like nano-caps. Sometimes you feel like you are the only person in the world following said stock, but the returns can be very good with decent hit rates.
 

ENP

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I think academic studies have shown that small caps over the years, on average, out perform the large blue chips (sorry I can't provide the reference but you might be able to search for something along these lines).

But at the end of the day, you make a good return from your skill and knowledge on the particular sector / companies. So look within yourself and see where the advantage lies for you.

Personally I like nano-caps. Sometimes you feel like you are the only person in the world following said stock, but the returns can be very good with decent hit rates.
Yes, I've read a few books and articles showing small caps generally out perform large caps over time. However, I would invest in individual companies, so this data would be as accurate as taking an index.

The main issue I have with small cap stocks is that it's more speculation because you are essentially betting that this small cap stock will grow into a big one. Where as buying a big stock, you know it has stood the test of time and is dominant in its chosen industry.

So the question I really have, is how do you determine which small cap stocks have the ability to grow indefinitely rather than fizzle out after a good run of a few years at the beginning. I see more risk with small cap because their longer term future is unproven and more uncertain.
 

ROE

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It's hard to get serious compounding in larger caps with a purely domestic focus because they are limited by their size, but over the past year I've gotten pretty decent returns from PPT, COH, CTX and TLS and a pretty flat effort from QBE (despite it's price gyrations I'm about square). It is possible to generate a decent return on large caps, just difficult to repeat it over and over unless they have an international focus.
You can get extremely good return on large cap if you mix options into it and know what you are doing...
I get around 15-20% annually with dividend and options... but only on stock 5-10 stock I know extremely well and can price risk..I ignore the rest I concentrate on the 5-10 stocks years in year out..every year my knowledge on those business get better so I can price risk better.....ASX and other use computer and formular to price risk I use my knowledge to price risk against them :)
 

So_Cynical

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I hold big caps, mid, small and micro...but focus on the mid and small as this has proven to be the most profitable for me over the last 5 years,big caps stocks can be good movers if you can catch the bottom, rarely happens though i did catch the recent bottoms for CPU and BLD.
 
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Bigger companies such as Coca Cola Amatil as I mentioned before, have been around for many years, are the market leaders, have a competitive advantage and are very reliable. I guess they help me sleep easier as compared to a smaller company where their future is more uncertain.

Don't invest in something for 10 minutes if you wouldn't invest in it for 10 years.... right?
I agree that investing in companies that have been around for many years, are market leaders, have competitive advantages and reliability is attractive - but there's no reason to suppose that these companies are exclusively large companies. Focus on the companies - not their sizes - would be my advice. A company that starts off with a market cap of 20 mill and goes to 200 mill will still not be seen as a large cap, but will still get you lovely returns - no need to pick companies that will 'turn in to large caps'. With regards to picking winners, you seem to have worked it out for yourself (competitive advantage, etc etc).
 
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I think academic studies have shown that small caps over the years, on average, out perform the large blue chips (sorry I can't provide the reference but you might be able to search for something along these lines).

But at the end of the day, you make a good return from your skill and knowledge on the particular sector / companies. So look within yourself and see where the advantage lies for you.

Personally I like nano-caps. Sometimes you feel like you are the only person in the world following said stock, but the returns can be very good with decent hit rates.
In line with skc's post, have a look at research by French and Fama regarding value and small caps. As ENP pointed out they take an index approach to comparing these vs growth and large caps but gives you a general idea that over the long term value/small caps outperform growth/large or just the market in general.

I have a mixed bag really from when I started investing 3.5 years ago to today as my approach and knowledge has evolved. These days I concentrate more on the mid/small area due to the same reasons many have mentioned, more opportunity for compounding growth and income in this space due to the constrained nature of the aussie share market. It's been quite frustrating of late though, most companies that have been showing up in my scans are engineering/mining services based which is a sector i'm not really confident in at the moment.

I've pretty much given up on the nano space, haven't done very well in that area so pretty much have cut my losses and won't be dabbling in that area for some time. As others have said, best to find the space you can apply your knowledge the best and stick to what you know :)
 
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All else being equal most of us would have a preference toward larger companies - often they have got to where they are with good reason and tend to compete against similarly large companies due to either large capital requirements or their own big business efficiency levels they force others to compete against - these are barriers of entry that helps sustain profitability considering most of them are at least reasonably good at demanding acceptable returns from their underlying business activities such that their is limited downward pressure on returns if not for technology or efficiency disadvantages compared to their competitors. Based on my own risk/return objectives though the large end tends to vary in market pricing between what I consider a reasonable return and clearly too low return over the vast majority of time. So if you have high expectations you have to be incredibly patient (buffet style) to get very good value on a minor number of individual trades or have an alternative strategy - eg maybe you are only focused on trying to achieving a minor advantage over the market via making the best basket you can out of the less than desirable bunch, or alternatively trying to find an advantage through higher trading frequency. The upside to the big end of town is that the majority of them are at least not grossly overpriced - if you can accept that you are not part of the minority group capable of outperforming over the long term (which from what I have read through a number of not particularly significant studies appears to be less than 20% of individual investors) then picking a handful of large companies and not trading heavily will usually do you fairly well comparative to your ability. On a side note though under normal market conditions (when fear isn't overpowering) there is a lot of smart-money waiting if stock prices go low, but when prices turn the always excite-able dumb-money can facilitate the exit of the smart-money leaving only dumb-money to play around with themselves at unreasonable levels while the smart money sits patiently on the side (typically the majority of shares would still be held by inactive long-term holders but by definition they don't help efficient market pricing and smart-money selling short isn't that helpful either). I think this is partly why I see prices trend between acceptable and overpriced - the smart money has a stronger influence over the floor price.

The small end of town is completely different. There are lots more barely sustainable companies and also what would at least appear to me to be clearly unsustainable companies abusing shareholder funds, far more significant key person risks, and competition among other small companies (often many private ones you struggle to find out about despite research attempts) which may include some just happy to make a modest living and be their own boss rather than demanding a reasonable return on capital and these put downward pressure on the profitability of others in their market. Far fewer of them have enough market attention which makes it easier for dumb money to outweigh the smart money and create poor pricing in both directions - theres lots of opportunity however the variables are usually powerful and so factoring in a required discount for a margin of safety become incredibly important if your trying to stick to few long term actions. ie your margin of safety must shift the high degree of luck due to high unpredictability from a positive/negative chance effect to a very-positive/minor-negative chance which is then averaged across your few trades to become a positive-to-very-positive/minor-positive-to-neutral chance.. I hope that makes sense - if you don't eliminate at least the majority of the downside potential through margin of safety and averaging of trades (diversification but over time is just as good as one-time diversification if you are not over committing to any one trade) you are gambling not investing. There is alot of oppurtunity in small caps but on average the the better investors will hog the positive opportunity and leave all the dud loss-making moves for the rest.

Personally I've made clearly above accumulation index profits over the last 5 years (before that was shaky to say the least but I think I may have learnt enough to justify at least part of my out-performance now... hopefully). That profit is roughly equally shared between the very large and very small end. From my perspective there is clearly opportunities in all categories. My smaller companies do tend to have faster turnover as they are inherently more exposed to changing market dynamics and more price volatility which both can necessitate action but all my investments would be considered long term holds by most people. At times I find myself with almost only large caps and other times my small caps outweigh my large caps - It is never intentional it's just the way it pans out from time to time after judging each co on its merits. I find that mid caps are usually underweight in my portfolio, maybe its an unintended result of my investment method I don't know or care.
 
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While the banks and miners and a few other large caps have been struggling, there seems to have been a bit of a resurgence in quite a few small caps ex resources in the last few months. Anyone else noticed this trend. Usually when the market goes backwards it tends to be the small caps that get hit.
 

Wysiwyg

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Anyone else noticed this trend. Usually when the market goes backwards it tends to be the small caps that get hit.
Peter2 on the momentum thread. Only trade stocks going up. :D
 
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I like big caps like ANZ and TLS as you can make simple cases for them when the time is right. EG.

- Dividend Yield 8-9% FF.
- At or below long term valuation
- Sustainable business able to maintain and grow revenue / margins etc...

If all that is ticked off, you've set a high floor at 8-9% returns, plus any valuation expansion and EPS growth.

Not a lot of ways to go wrong that you wouldn't be able to see.

EG. If you applied that to WOW you could see their margins were a world record by 30% 2 years ago, and so question the sustainability, likewise BHP at record commodity prices.

I find with smaller companies I'm making more guesses, which maybe is why there's a risk premium and better returns.
 
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