I agree. There is often an assumption that the best return will be from blue chips. Frequently it just ain't so.Nope I find Small caps with qualities I like performs no worse
than the big blue-chip, some operate in a captive market where it actually command far better return than blue-chip.
My assumption is that the smaller stocks have the potential to provide greater returns then blue chips due to their scale and number of shareholders on issue. While the blue chips generally provide a more steady return once again due to their scale and shareholders on issue.
So it becomes a bit of a trade off, small caps can provide greater opportunities with hightened volatility (in my view), while blue chips can provide more steady results and less volatility. This is a very generalised statement though and can vary depending on the individual company.
The smaller the company, the wilder its price action and the more difficult it is to trade for most people except for a few skilled individuals who specialise in small stocks. I've met hundreds of traders and investors over the years through my involvement with the ATAA, and so many of them have told me they've blown one account after another by chasing what they believed would be astronomical returns from small stocks.
Good question. I think it's perfectly reasonable to demand more upside (ie. a greater discount) when looking at more risky situations. There are many reasons why smaller companies are more risky and you've already mentioned a few.
It is interesting to note that you're return on smaller caps matches that of your larger cap holdings - is there also an increase in the volatility of returns?
I've had some success with small stocks, at least the non resource/energy/biotech variety of small stocks...there's a few small/micro caps with niche business that have been very good to me...just a matter of using the volatility to your advantage and buying the bottom of the range when the opportunity presents its self.
Sorry, what I meant was this - say you do 5 transactions in big companies and 5 in small and your returns are as follows:I don't subscribe to the theory more volatile = more risk
Sorry, what I meant was this - say you do 5 transactions in big companies and 5 in small and your returns are as follows:
Big cap: 12%, 15%, 7%, 11%, 12%
Small cap: -75%, -10%, 30%, -18%, 200%
Or are your returns relatively comparable?
Another alternative is to buy blue chips and then write options on them each month. The return from the options premiums can add an extra 15 to 20% yearly to your profit from blue chips, and two or three times that much if you write options on US blue chips. However, there are limited numbers of ASX blue chips suited to this strategy.
Most people never use options to produce extra income, because they know nothing about them and they never take the trouble to learn.
One of the big benefits I've found by being an ATAA member is that you get exposed to various strategies that you otherwise may never have come across.
Roe - are there times when you find a stock that shapes up well in terms of both fundamentals and value, so you buy it and then it stagnates and goes nowhere for a prolonged period of time?
How long would you be willing to stick with a stock that doesn't go up like you expected it would?
As long as it paid me the dividend yield of long term bonds or more I'm happy I don't mind a couple of them stay in the lager for a while as long a dividend stream keep coming in.
I haven't had any experience where the majority of them are like that...
Most of my investment I give it 3-5 years to judge whether it's a keeper or something I need to let go....
My investment horizon is very long probably another 25-30 years to go..
I pure as much cash in as I can and I do the best I can, I don't try any fancy tricks to beat the market but to get steady return if it turn out to be 8% one year or 15% another or 50% another then so be it.....
Just good old fashion conservative save and invest and compounding'
So you might hang on to a sleepy stock for as long as five years before you tire of it's poor performance and decide to let it go?
You have a lot of patience, my friend. In fact I'd suggest that your patience is at times costing you big money by causing you to miss out on stocks that sometimes make gains of well over 100% in less than a year while your funds are tied up in a sleeper.
Your policy of 'good old fashion conservative save and invest and compounding' can be applied to these powerhouse stocks just as well as to any other stock.
Lot of stock that pass me by that make 100% or 1000% gain
Lot of people make money with margin loan and amplified their growth
Probably a Billion people on this planet make more money than me.
Do I care? Not really, I don't want to be someone else I want to be me, I'm very content of what I have and to be me I keep doing what I do with very little influence from the outside.
Come GFC and other world events I can sleep and buy more stocks cheap
while everyone is out to safe guard their capital and get out of stocks
“True contentment depends not upon what we have; a tub was large enough for Diogenes, but a world was too little for Alexander.”
That's fair comment.
We're usually happy and contented when we're doing something that suits our personality.
And happiness is the most important thing of all.
Happy Easter to you, Roe. And to everyone else on ASF.
I've always wondered how the rule of simple maths reconcile with Buffet's exposure to Gen Re (who reinsure all manor of long tail risks). Any thoughts?As Ben Graham said in the Intelligent Investor only elementary maths should ever be required.
ROE that is a great list of companies. I was wondering how do you determine how much to pay for them? They all seem to have great growth prospects but a company like ONT seems to be pretty tightly held. Do you just buy it anyway in the knowledge that it will be a great return in the long run, or are you patient and prepared to wait to buy on bad news or a change in market sentiment?
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