Of late I was amazed to read someone’s comment in i3investor that 99% of the stocks listed in Bursa are rubbish stocks. I thought I even read that the figure is 99.9%. With less than a thousand stocks listed in Bursa, that would mean less than 10 stocks in Bursa are investible, and the rest are rubbish and anybody who has invested in them should prepare to burn big holes in their pockets.
I also read a comment saying that all the small capitalization stocks, which the writer classified them as less than RM500 million market cap, are mostly rubbish, pumped and dumped kind of stocks. Anyone who has invested in them would most probably lose their pants. Only investors who focus on investing in a handful of quality big caps, and hold them forever, unless something changes, will only make good money.
I have just written an article on “Two paths of value investing” in the link below,
https://klse.i3investor.com/blogs/kcchongnz/188915.jsp
The first path was to buy a random portfolio of 8 great quality stocks at fair prices as suggested by an i3investor forumer over the last few years which gave a CAGR of 15.4% over a 10-year period compared to the return of the broad index of just 4.1% over the same period. A great return indeed.
The second path was to buy a portfolio of good but not-so-great stocks at cheap prices, and sell them when their share prices have risen above their intrinsic values. The article provided evidence on 20 small to medium capitalization stocks compiled by the Chinese periodical The Busy Weekly which returned a CAGR between 29% to 43% over the 10 years period, compared to the return of the broad index estimated to be about 5.5% during the same period.
The above 28 multi-bagger stocks already made up about 3% of the stocks listed in Bursa. It can also be seen that those small capitalized stocks made much bigger return than those big capitalized stocks.
In the above article, I have also shown in my own experience with my three established portfolios of mostly small capitalized stocks as published in i3investor 5 years prior made extra-ordinary return, many times the return of the broad index.
There are many other investors here also do not focus on big capitalized stocks to invest in, some of them are in fact value traders, make a bet on themes, and out with extra-ordinary return when the theme changes, even in a short period.
I have also heard about short-term traders doing well too, but this is very hard to validate.
There were many other stocks, big or small caps which had made outsized returns since 10 years ago. I would say easily more than 100 of them, or more than 10% of those listed in Bursa.
We are here talking about a longer period of time, 3, 5 or 10 years of investing. Some stocks even become multi-baggers in just a matter of a few months and investors can exit with good profit without having to hold them for long time.
Just because some stocks following value investing lost money in 2018 doesn’t mean they are rubbish stocks. They are only rubbish stocks if their fundamentals suck. It is also not a matter if they are RM10b, RM5b, or RM100m market cap.
Hence, I can easily conclude that the statement that 99.9%, or 90% of the stocks listed in Bursa are rubbish stocks is rubbish.
The extra-ordinary return of those stocks above were mostly due to the phenomenal growth in their earnings, and when they were selling at fair or cheap prices. It was not because if they were small cap or big cap. They do not need a fantastic management, or must be a fantastic business too, but a credible management and a reasonably good business will do.
In my personal journey in investing, I mostly pick small and mid-cap. Why?
Big cap stocks are closely followed by institutional and fund managers. Generally, unless there is a temporary set-back, they are often already fully valued, or even overvalued because of the action of bidding up their prices by all the fund managers and institutional investors. Big business, like a big elephant, is harder to grow fast compared to a smaller business.
Think about some of the big cap stocks such as Genting, GenM, Sime Darby, TM, Tenaga, Maxis, Axiata, AMMB, IHH, RHB, MISC, etc,. How much return you can get since 10 years ago?
Hence, most value retail investors like me look at the forgotten and beaten path, trying to find values where others, i.e. the fund managers, institutional investors are not interested in because of the sheer size of their fund under management, and have no mandate to invest in.
Seth Klarmen said,
“Picking through the crumbs left by investment elephants can be rewarding.”
To get extra-ordinary return is not about if the stock is listed in the DJI, S&P 500, NASDAQ, or Russel 5000 etc. It is not about if it is listed in the Main Board, or the ACE Market of Bursa.
Rather it is about buying great companies selling at reasonable prices or good companies selling at cheap price, and sell them for profit when they are no longer at fair prices.
Is investing in small cap company riskier? Yes and no. It depends on liquidity, company fundamentals, the price you pay and a whole lot of other things. In fact, paying too much for an asset is the riskiest thing to do, even for a great company.
“The price you pay determines your return” ROGER MONTGOMERY
Happy investing.
K C Chong (ckc14invest@gmail.com)
https://klse.i3investor.com/blogs/kcchongnz/190808.jsp
