Predominantly, What Size Companies Do You Invest In?

[ragnarisapirate]

I ask this, as I am curious to the pools that most of the members here invest in. Personally, I am most comfortable staying below $25 million and  prefer even more to be below $10 million simply because there (seems) to be a lot less competition. Though, when you aren't dealing with huge amounts of capital, you can allocate in such a way where you don't own a whole nano-cap company, and your portfolio can still preform well.

 

Really, a lot of this poll is because I am curious as to what people think about investing in big companies. For example, Buffett invests in them now, because he has to. For some of the money managers out there, I, and I would imagine others, would be interested in hearing about how you invest as a result of your managing money (in a fund or some institutional form), versus how you would invest if it were just your own. Maybe you manage the same, but, I think that this could be an interesting discussion.

[twacowfca]

I ask this, as I am curious to the pools that most of the members here invest in. Personally, I am most comfortable staying below $25 million and  prefer even more to be below $10 million simply because there (seems) to be a lot less competition. Though, when you aren't dealing with huge amounts of capital, you can allocate in such a way where you don't own a whole nano-cap company, and your portfolio can still preform well.

 

Really, a lot of this poll is because I am curious as to what people think about investing in big companies. For example, Buffett invests in them now, because he has to. For some of the money managers out there, I, and I would imagine others, would be interested in hearing about how you invest as a result of your managing money (in a fund or some institutional form), versus how you would invest if it were just your own. Maybe you manage the same, but, I think that this could be an interesting discussion.

 

Sorry.  Unable to take survey because we don't target a particular"style".  One place we rarely go is micro cap, not because that is beneath us, but because it can be illiquid, and sizeable perks for managers or control shareholders could nullify the ability of minority shareholders to participate in the success of the company.  Larger companies are more transparent, and occasionally we can find a great company with a CEO who has a lot of equity or quasi equity who puts minority shareholders pari passu or even ahead of the CEO (think Buffett). :)

 

There is an exception, however. Occasionally, an OK larger company gets knocked down drastically in price.  Then, it is classified as a small cap or micro cap.  This is often a good fishing hole.  Interestingly, a large part of the "small cap effect" is actually some of these larger companies rebounding after they have been beaten down.  :)

[zippy1]

So do you mean by the number of positions or do you mean by portfolio weighting?

[giofranchi]

I ask this, as I am curious to the pools that most of the members here invest in. Personally, I am most comfortable staying below $25 million and  prefer even more to be below $10 million simply because there (seems) to be a lot less competition. Though, when you aren't dealing with huge amounts of capital, you can allocate in such a way where you don't own a whole nano-cap company, and your portfolio can still preform well.

 

Really, a lot of this poll is because I am curious as to what people think about investing in big companies. For example, Buffett invests in them now, because he has to. For some of the money managers out there, I, and I would imagine others, would be interested in hearing about how you invest as a result of your managing money (in a fund or some institutional form), versus how you would invest if it were just your own. Maybe you manage the same, but, I think that this could be an interesting discussion.

 

Sorry.  Unable to take survey because we don't target a particular"style".  One place we rarely go is micro cap, not because that is beneath us, but because it can be illiquid, and sizeable perks for managers or control shareholders could nullify the ability of minority shareholders to participate in the success of the company.  Larger companies are more transparent, and occasionally we can find a great company with a CEO who has a lot of equity or quasi equity who puts minority shareholders pari passu or even ahead of the CEO (think Buffett). :)

 

There is an exception, however. Occasionally, an OK larger company gets knocked down drastically in price.  Then, it is classified as a small cap or micro cap.  This is often a good fishing hole.  Interestingly, a large part of the "small cap effect" is actually some of these larger companies rebounding after they have been beaten down.  :)

 

As always, I agree with twacowfca. I put much more emphasis on the quality of the managers I am partnering with, than the size of their company. I know it might sound ridiculous, but also when I buy gold and silver, I pay attention to "management"…!! I prefer the Sprott Physical Gold Trust (PHYS) to the GLD ETF, and I prefer the Sprott Physical Silver Trust (PSLV) to the SLV ETF… Call me nuts!  ;D

That being said, I generally don’t like too big a company (even the best manager will face difficulties to grow things to the sky), and I don’t like too old a manager (if something cannot go on forever, it eventually will stop… as sad as it might be, such is life!).

So, it is very difficult for me to vote. Anyway, being FFH my firm’s single largest investment (by far), I vote $1 billion to $10 billion… but it clearly is not all that meaningful!

 

giofranchi

[Charlie]

"Interestingly, a large part of the "small cap effect" is actually some of these larger companies rebounding after they have been beaten down.  :)"

 

Do you have any concret evidence about this?  :)

 

One evidence is perhaps the O´Higgins strategy: You take the 5 stocks of the "Dogs of the Dow" with the lowest share price and rebalance yearly. I think the annual outperformance to the Dow Jones/DAX is around 5%. This strategy worked for a very long time in the Dow Jones and DAX index.

 

 

 

 

 

 

[onyx1]

Illiquidity keeps me away from less than $50mm market caps.  This mostly applies to the $50-75mm market caps as well, but exceptions are made for special situations where the company is in runoff or liquidation mode.

[Packer16]

I am usually in the $100 m to $600 m space.  I will go below $100m if I am comfortable with the management.  There always seems to be bargains in the less than $50 m space but the issues of liquidity, control and finding adequate bargains in larger firms (less than 40 cent dollars) have kept me from this space.  A question those who invest in micro-caps, how have you mitigated these issues and what types of long term returns have you generated?  TIA.

 

Packer

[boilermaker75]

I would say I am in the $1billion plus, but usually companies above $10 billion like BRK, WFC, BAC, DOV, MDT, ITW, PH, etc.  I also do a lot of put writing on the companies I am investing in. So I like a company that has many strike prices and high option volume.

 

I am usually about 90% invested.  I usually have open put positions that would put me on margin by about 10% if I was put to on everything. I get put to only on about 5% of my option positions because I am writing puts at strike prices which I believe afford a considerable margin of safety. So when I get put to I often keep the position, adding to my LTBH positions. Otherwise I turn around and write a covered call usually at the price I was put to.

[twacowfca]

"Interestingly, a large part of the "small cap effect" is actually some of these larger companies rebounding after they have been beaten down.  :)"

 

Do you have any concret evidence about this?  :)

 

One evidence is perhaps the O´Higgins strategy: You take the 5 stocks of the "Dogs of the Dow" with the lowest share price and rebalance yearly. I think the annual outperformance to the Dow Jones/DAX is around 5%. This strategy worked for a very long time in the Dow Jones and DAX index.

 

The evidence would be the methodology used in particular studies.  Most studies of the small cap effect take various deciles or quintiles of stocks by market cap, track the performance of each group for a year and then rebalance. Obviously, the smallest cap(s) by decile include a number of beaten down companies, especially after the market has taken a dive. The rebound in that case can be huge.  Select Comfort got beaten down in the last market meltdown to the point that it was a microcap and then bounced 20 or 30 times above it's low.  Same with Crocs and many others.

 

I can't give a citation, but I think there has been at least one study that tracked all the stocks in various market cap deciles, including those that went out of business, in rolling multi year periods. I think there is still a small cap effect in general, although much less than in the studies that rebalance yearly. 

 

Most of the small cap effect appears merely to be regression to the mean.  On another thread, I showed how to get dramatic outperformance in a volatile, but ultimately flat market simply by making purchases and sales and then rebalancing to a 50% cash position as the market rises and falls. Essentially, this means buying when a flat, trendless market has smaller capitalization and selling when the market has higher capitalization.  There have been long periods when the market hasn't been bullish that small caps have under performed.

[twacowfca]

I would say I am in the $1billion plus, but usually companies above $10 billion like BRK, WFC, BAC, DOV, MDT, ITW, PH, etc.  I also do a lot of put writing on the companies I am investing in. So I like a company that has many strike prices and high option volume.

 

I am usually about 90% invested.  I usually have open put positions that would put me on margin by about 10% if I was put to on everything. I get put to only on about 5% of my option positions because I am writing puts at strike prices which I believe afford a considerable margin of safety. So when I get put to I often keep the position, adding to my LTBH positions. Otherwise I turn around and write a covered call usually at the price I was put to.

 

That's a good way to have good above average returns and steady income with little downside, occasionally having to buy a good company at a bargain price.  How did you do in the 2008 2009 market meltdown, if I may ask?  What are your cumulative or average annual returns from 2007 thru 2012?

[ragnarisapirate]

Sorry for not making this more clear. It was more of a "where do you find yourself investing" question, rather than what do you aim to invest in. I am the first person to say it's probably a mistake to put any sort of limits on what you can or can do. I just find myself investing in really small companies.

 

Also, as far as weighting in the portfolio or number of allocations, it's really up to you. I think the best way to say it, would probably be, where do you spend the most time investing.

 

Another question; is the concern of illiquidity due to potential redemptions of clients? Wild price swings? Or just wanting to have a historic measure of liquidity to protect you in the event that you want to get out or even establish a position with relative ease?

[Palantir]

Funny poll. I see your point though. When I first started investing 1-2 years ago, I went in with the intention of being a hardcore microcap investor. I was going to buy obscure, illiquid stocks trading at massive discounts to IV, things below 50M. But when I actually start investing, I find myself gravitating towards large and megacaps.

 

They say micros and smalls have the best opportunity as they have lots of "room to grow", but large caps have better quality, they have huge established customer bases, distribution chains, institutional knowledge, brand names, and inertia! Even if organic growth slows, they can rapidly juice returns by buying back stock or growing the dividend, so there is no real lack of opportunity, and even a fast growing 50B company can double, triple, and quadruple in size. Given that I am more of a "moat" investor, I'd rather invest once, and watch a company compound value for years and years.

 

But I'm still on the lookout for small cap moat firms - currently invested in Reed's and Neustar.

[NormR]

The Winner's Curse has been much on my mind re: size.

[SharperDingaan]

We don't look to size, & chiefly exclude by exchange; kiss of death if you're not listed on the TSE or the dominant Int'l regional exchange. We just think there are too many scams/turds in the excluded mixes to make it worth the risk or time investment.

 

Sure we might miss the next Microsoft at < $5.00/share. We'll just pick it up at $6/share  ;) on the big board, if/when it graduates.

[Hielko]

I don't target a certain size, but do often find myself investing in (very) small companies. The amount of money that I manage is relative small so low liquidity isn't an issue, and the biggest reason is that's simply often just way more obvious that a certain company is undervalued. For bigger companies you often have to answer difficult questions about their competitive advantage and the industry dynamics. The analysis required to conclude that a profitable company that's trading for less than NCAV is cheap is a whole lot easier.

[T-bone1]

We don't limit ourselves to size, but I would make an observation that I find interesting:

 

Most of the value I see today is in very small (Oddballstocks has documented many of these and CNRD is a personal favorite of mine) companies, or quite large companies (FFH, CHK, BRK/A, DELL).  I would add a number of the financials like BAC to this list, but I don't pretend to understand them, so I will leave them off.

 

I think one reason for this is private equity.  Some astute commentator (probable a link I found on this board) made the point that the traditionally lucrative space of small cap investing ($100 million -$1 billion) has gotten extremely difficult.  The reason he gave is that extremely smart investors from private equity firms have already picked-over the entire space - and seen the internal numbers to boot.  The commentator suggested that he wouldn't want to go near a sector that had already been picked over in such a manner.

 

I think that the relative abundance of very cheap stocks (at least by our estimation) in the micro-cap and large cap sector - and dearth of such bargains in between - is due to the influence of private equity.  I think very small stocks are either too small (or family controlled) for PE, and I don't think the banks will lend for PE to start going after larger companies like DELL.

 

Just my two cents.  I would be interested if others disagree on my assessment of where the value is currently, or my hypothesis as to why that is.

 

T-Bone1     

 

 

[boilermaker75]

I would say I am in the $1billion plus, but usually companies above $10 billion like BRK, WFC, BAC, DOV, MDT, ITW, PH, etc.  I also do a lot of put writing on the companies I am investing in. So I like a company that has many strike prices and high option volume.

 

I am usually about 90% invested.  I usually have open put positions that would put me on margin by about 10% if I was put to on everything. I get put to only on about 5% of my option positions because I am writing puts at strike prices which I believe afford a considerable margin of safety. So when I get put to I often keep the position, adding to my LTBH positions. Otherwise I turn around and write a covered call usually at the price I was put to.

 

That's a good way to have good above average returns and steady income with little downside, occasionally having to buy a good company at a bargain price.  How did you do in the 2008 2009 market meltdown, if I may ask?  What are your cumulative or average annual returns from 2007 thru 2012?

 

The percentage I am in cash, and the number of potential positions because of being short puts, does vary. But I have been doing some form of this over the time period you ask about. Here are my returns for recent years

 

2007  22%

2008  -5%

2009  13.7%

2010  17%

2011    5.4%

2012  18.3%

[SharperDingaan]

Agree on the PE assessment, but would add two outliers ....

 

Most PE is institutional, therefore subject to the typical IPS minimums threshold. Headline events that temporarily drive the market price below a minimum threshold, typically act as tipping points. OK for about a week ... but after 2 weeks the position gets marked down ... whether there are trades or not. The PM's least risky personal option is to dump before the rush, & the first to dump will start a run. Needless to say XYZ becomes incredibly cheap, & bad mouthed everywhere in the media. Large cap or small cap .... the sell-off is almost always grossly exaggerated. A great time to offer liquidity at an extortionate price  ;)   

 

A good portion of the bank owned PE is also not so private. PPP's may be the poster children - but don't ignore the proxy's doing serial accretive acquisitions, taking on bank supplied credit lines, & issuing equity along the way. Only to get taken out by said bank a few years later? Way too visible if the bank itself did it, but very different if done through a proxy  ;)

 

Obviously, if you can deduct who the outliers are - you are going to do very well.

 

 

[ItsAValueTrap]

For example, Buffett invests in them now, because he has to.

He invested in Amex in his partnership days (and it was has largest position).  It was even in the headlines over the salad oil scandal.

 

I don't think it makes sense to discriminate against a stock just because of its market cap.

 

On the other hand, I would make an exception for some microcap stocks.  For companies with really small market capitalizations, there are unavoidable overhead costs associated with a public listing: listing fees, audit fees, and a board of directors.  These overhead costs can suck up a lot of profit.  A good management team would avoid that situation (e.g. delist, take the company private, not IPO in the first place, etc.).

The microcap space is also filled with many stocks with pump and dump components to them.  Pump and dump penny stocks will be overrepresented in the microcap space.

[twacowfca]

I would say I am in the $1billion plus, but usually companies above $10 billion like BRK, WFC, BAC, DOV, MDT, ITW, PH, etc.  I also do a lot of put writing on the companies I am investing in. So I like a company that has many strike prices and high option volume.

 

I am usually about 90% invested.  I usually have open put positions that would put me on margin by about 10% if I was put to on everything. I get put to only on about 5% of my option positions because I am writing puts at strike prices which I believe afford a considerable margin of safety. So when I get put to I often keep the position, adding to my LTBH positions. Otherwise I turn around and write a covered call usually at the price I was put to.

 

That's a good way to have good above average returns and steady income with little downside, occasionally having to buy a good company at a bargain price.  How did you do in the 2008 2009 market meltdown, if I may ask?  What are your cumulative or average annual returns from 2007 thru 2012?

 

The percentage I am in cash, and the number of potential positions because of being short puts, does vary. But I have been doing some form of this over the time period you ask about. Here are my returns for recent years

 

2007  22%

2008  -5%

2009  13.7%

2010  17%

2011    5.4%

2012  18.3%

 

Those are very good returns!  They are even more impressive when adjusted for volatility.  Congratulations!  :)

[oddballstocks]

I didn't vote, but I invest primarily in smaller companies, usually $200m or less in market cap.  T-bone really hit the nail on the head, very small and very large companies are cheap, the middle isn't.

 

As someone who's deep in the mud with a lot of the tiny companies it's worth mentioning that some are cheap in name only.  By this I mean if you want a non-family controlled company with liquidity it's simply not happening.  If you're willing to buy into someone else's business (and most on this board are..BRK..FFH) and accept some level of illiquidity there are cheap companies.

 

Probably the cheapest area of the US market right now is in community banks.  I know a lot of investors shy away from banks, but this is a cheap sector, and they're easy to research.  If you can understand banks it's very easy to compare First Bank of Wichita to First Bank of Peoria.  Community banking is classic banking, take in deposits, make loans, pay employees and rent, earn a spread.

 

I invest in smaller stocks because my time is limited.  I have a non-investment job, a family, and other hobbies.  While investing takes up a disproportionate amount of my time I don't have the time to sit and read the AIG or BAC annual reports.  Many of these small companies have very simple annual reports, I can read Logan Clay Products' annual report in 15 minutes or less, and their quarterly reports are one printed page.  I also like the local aspect of the companies I invest in.  I've talked to numerous executives at small companies, as a small investor I'd never get the time of day if I tried to talk to the CFO of JNJ or INTC.

 

Of course all of this suites my personality, trying to invest contrary to that is recipe for failure.

[boilermaker75]

I would say I am in the $1billion plus, but usually companies above $10 billion like BRK, WFC, BAC, DOV, MDT, ITW, PH, etc.  I also do a lot of put writing on the companies I am investing in. So I like a company that has many strike prices and high option volume.

 

I am usually about 90% invested.  I usually have open put positions that would put me on margin by about 10% if I was put to on everything. I get put to only on about 5% of my option positions because I am writing puts at strike prices which I believe afford a considerable margin of safety. So when I get put to I often keep the position, adding to my LTBH positions. Otherwise I turn around and write a covered call usually at the price I was put to.

 

That's a good way to have good above average returns and steady income with little downside, occasionally having to buy a good company at a bargain price.  How did you do in the 2008 2009 market meltdown, if I may ask?  What are your cumulative or average annual returns from 2007 thru 2012?

 

The percentage I am in cash, and the number of potential positions because of being short puts, does vary. But I have been doing some form of this over the time period you ask about. Here are my returns for recent years

 

2007  22%

2008  -5%

2009  13.7%

2010  17%

2011    5.4%

2012  18.3%

 

Those are very good returns!  They are even more impressive when adjusted for volatility.  Congratulations!  :)

 

twacowfca,

 

Thanks. Also almost all of my long positions were established by being put to. Writing a put helps me to be patient and wait for my price. There have been very few stocks that I have wanted to acquire where this did not work as a way of establishing my position.

 

Boiler

[twacowfca]

I didn't vote, but I invest primarily in smaller companies, usually $200m or less in market cap.  T-bone really hit the nail on the head, very small and very large companies are cheap, the middle isn't.

 

As someone who's deep in the mud with a lot of the tiny companies it's worth mentioning that some are cheap in name only.  By this I mean if you want a non-family controlled company with liquidity it's simply not happening.  If you're willing to buy into someone else's business (and most on this board are..BRK..FFH) and accept some level of illiquidity there are cheap companies.

 

Probably the cheapest area of the US market right now is in community banks.  I know a lot of investors shy away from banks, but this is a cheap sector, and they're easy to research.  If you can understand banks it's very easy to compare First Bank of Wichita to First Bank of Peoria.  Community banking is classic banking, take in deposits, make loans, pay employees and rent, earn a spread.

 

I invest in smaller stocks because my time is limited.  I have a non-investment job, a family, and other hobbies.  While investing takes up a disproportionate amount of my time I don't have the time to sit and read the AIG or BAC annual reports.  Many of these small companies have very simple annual reports, I can read Logan Clay Products' annual report in 15 minutes or less, and their quarterly reports are one printed page.  I also like the local aspect of the companies I invest in.  I've talked to numerous executives at small companies, as a small investor I'd never get the time of day if I tried to talk to the CFO of JNJ or INTC.

 

Of course all of this suites my personality, trying to invest contrary to that is recipe for failure.

 

Oops! I forgot. Community banking may have much less pocket risk than with other types of small businesses.  The investors are usually local business people, often customers of the bank.  Thus, there is usually commonality of interest between management and shareholders.

 

What small banks do you like best?

[Palantir]

Ok.....anybody have any links on articles that tell you how to analyze banks? I really have no idea, never look at the financials sector.

[valueinvesting101]

You can see Warren prefers WFC and USB over lot of other banks available in US. You can start by studying their business model and reports. Banking is general is very huge sector and understanding all facets of it is quite difficult.

 

Also you can look at other banks like JPM, BAC, GS, MS to understand how to they are earning money differently. Banks have been termed as cyclical but I find that hard to digest. They are not exactly cyclical as commodities might be.

 

Worth studying why banks blow up to understand how banking works. Munger quote and speech compilation posted here had some good insights about banking.