Small-Cap Investing

“Think about Wal-Mart for example. With a market capitalization of over $210 billion, it is very unlikely that they will double in the next few years–or ever for that matter. It’s already international, where else is it supposed to expand to?”

By Alex Vo, Contributing Blogger
From Vo Industries
Content Partner

In my finance class in high school, our final project was to construct a proposal of a minimum of ten stocks to an investor. Looking back, I can’t believe I got the mark I did. It might have been the highest in the class, but I don’t think it was anywhere near decent, at least compared to what I know now.

Okay, so…?

One of the purposes of this blog is for you to avoid some of the mistakes that I have ran into. In my proposal, I talked about how great it was that these companies that I selected were the most valuable, including the largest one, ExxonMobil along with General Electric and Bank of America. With a market capitalization (share price times shares outstanding, hence the value of a company) of almost $320 billion, the stock had moved no where. Lovely…

[pullquote]This method involves a lot of work and skill. But, it is also how Warren Buffett built his fortune.[/pullquote]

Interestingly enough, my teacher said to me, “I have never heard of this company before,” when we touched on Freeport McMoRan Copper & Gold Inc. (NYSE: FCX) in the interview portion of the assignment. Although a market capitalization of $37 billion is fairly large, it happened to be the smallest company in my proposal. To this day, it has been my largest return from the stocks I have selected in my assignment.

The tip here is to invest in small-cap companies if you want to hit a multi-bagger (double, triple, or even ten fold your money). Think about Wal-Mart for example. With a market capitalization of over $210 billion, it is very unlikely that they will double in the next few years–or ever for that matter. It’s already international, where else is it supposed to expand to?

On the other hand, think about a smaller retailer like Costco. With a market cap of $26.5 billion, which is still large, it is more likely for them to double to $53 billion and beyond. They have yet to receive international exposure as well, which gives opportunity for expansion and growth.

To add, some companies have many professionals researching them all day and there’s a very good chance that they will know more about the company than you. On the other hand, small-cap companies are under the radar of Wall Street analysis. A couple, if any, would be researching a small-cap company and chances are there will be things that they will miss. This is when investors like yourself scoop up as many shares as you can and wait until Wall Street catches on. All these giant companies were once small-caps too.

However, this is where your skills of analyzing company financial statements come into play. I won’t lie to you: this method involves a lot of work and skill. But, it is also how Warren Buffett built his fortune. If you have the interest and patience to do so, then maybe small-cap and value investing is right for you.

By Alex Vo, Contributing Blogger
From Vo Industries
Content Partner

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