Yesterday I told you the importance of investing in small companies which are at the start of their long and profitable journey of growth, and not at its end. Today I’d like to explain why…
There are 143 companies quoted on the stock market that are valued at more than £2bn. However, there are 1,755 that are valued at less than £100m - or twelve times as many.
One of the most exciting things about small company shares is that no-one knows much about them. Time after time I meet the directors of these small businesses and hear them complain that investors (and analysts) did not understand what we do.
That’s where I come in…
If you get it right, then you can make a lot of money. A £10m company that becomes a £100m company multiplies the value of your shares ten-fold. I think of my favourite companies as young, rather than small. They are at an early stage of their life. They are just starting on the journey that they hope will one day take them up into the ranks of the FTSE 100 giants.
Investing in small companies : big is cumbersome
This has many advantages over investing in a company that has already got there. Blue chip companies have run their race and are now mature. They are big, bureaucratic organisations full of frustrated middle management and bored secretaries. They are also run by directors who are in it for the status. The companies make decisions by committee. They make bad commercial choices in order to appease governments and regulators. The entrepreneurial flair that they once possessed has long since died.
To me it is just common sense to invest in small, young companies. The strange thing is that nobody ever tells you to do this…
The main reason for this is that the message does not really suit the powerful marketing departments of the big banks and investment management companies that claim to know what to do with our savings. But, if you want to believe them and not me, just listen to this - from the foremost authority on the statistical record of the UK stock market - Hoare Govette:
In 2006…“for the fourth year running, small-caps outperformed large-caps, with the HG Small Company (HGSC) Index giving a return of 25.1%, 8.4% above the FTSE All-Share. Over the last four years, the HGSC’s worst annual return was +20.3% (in 2004); and its worst return relative to the All-Share was +6.6% (in 2005). Small-cap investors have long-since recouped their losses from the 2000-03 bear market. Since the bottom of the market in March 2003, an investment in the HGSC has now trebled in value. Over the last eight years, the HGSC has returned 172 per cent, beating the FTSE All-Share by 119 per cent.”
That should be enough to convince you that shares in small companies are the place for your money. They are certainly the place for mine.
Each and every day I am in front of my computer at 7.00am absorbing all the day’s stock market news and looking for those jewels that I know I can spot before those lofty fund managers in the City come upon them. It is such good fun; and profitable too.
Regards,
Tom Bulford
for The Penny Sleuth
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