Business/Finance

Why investing in large caps is for fools?

Stock Market Money Charts Graphs Finance Stocks

Stock Market Money Charts Graphs Finance Stocks

Investing in large cap stocks is completely asinine, total tomfoolery and the function of irrational. Harsh, I know, but I stand behind those words – and let’s be honest for a minute – investing in large cap stocks is one of the most irrational and illogical moves a small-time investor can do.

If you are a retail investor – or even a fund manager with under one billion in assets under management – you are playing a fool’s game investing in large cap stocks. It makes zero sense to swim with the big dogs. You will have no advantage in large cap land. In large cap land, you are a one-legged man in an ass kicking contest. You’re going to get your ass kicked and you won’t be able to do anything about it!

As a small-time investor, you have zero informational advantage researching and investing in large caps. Large caps are complex. Large caps are for smart money. You are not smart money. You are dumb money.

Large caps typically have several business segments. Are you going to tell me you can efficiently model out and understand seven different business segments better than the hundreds of other analysts covering Apple, Google or General Electric? There is no way you can! You don’t have a million-dollar research budget. You can’t travel to every business segment General Electric owns. You can’t understand the business in-depth enough to make an intelligent decision. You are a brainwashed monkey if you think you can.

Any investment into a large cap by a small-time investor is pure speculative. The function of a successful investor is being partner in a portion of a business. If you can’t understand every single segment of General Electric, you are not being an investor or a businessman, you are being a speculative gambler.

If you are managing pennies (in this context anything under one billion) there is no sense researching a large cap. You will never have an informational advantage. There will be hundreds of analysts that know 100x more than you ever will about that company. Give up on the large cap research. It’s a fool’s game.

Another reason to drop the large cap investing is the lack of access to upper management. Do you think the CEO of Apple will ever want to talk to you? Dream on Ponyboy. Researching and investing in small and micro-cap securities will allow you access to upper management 90% of the time. Large caps, not so much.

Speaking to management of a company will give you an informational advantage. Furthermore, its likely you can get a tour of the asset you are bullish on in person. Think of all the information you can gather from a company tour! You won’t find that kind of research in large cap land as a small fry.

What’s worse than lack of access to management is the lack of returns. Large caps don’t even produce the best returns! Small and microcap stocks produce the most superior returns out there. Why would you stick your money in an asset class that has historically returned sub-par returns relative to their smaller counterparts? Are you high? Oh, I know, you probably just think volatility is a function of risk. That’s right, you went to business school, didn’t you?

Seriously though, the smaller the company, the better the returns – based on a back-tested historical basis. It will be extremely difficult producing alpha in large caps. I would rather stick with a back-tested methodology and have statistics on my side in small and micro-cap land.

And let’s get this straight – I didn’t go to business school and I don’t believe in the efficient market theory. But I do believe the market is efficient 99% of the time. The market is smart. The market is filled with geniuses who sit at their computers every day making cold calculated decisions on asset valuations. The market is almost always right – especially in large cap land.

However, in the small and micro-cap fields the market is less efficient. The lack of sheer liquidity can produce pockets of inefficiency that the well-informed researcher can take advantage of. Information is not as wildly disseminated within the smaller companies of the market. I have taken advantage of public information others were not aware about in the micro-cap space in the past. If I was investing in large caps this would be much harder to do.

So why are you still investing in large caps? I would love to hear your rationale on why a large cap strategy makes sense for your penny pocket portfolio. Comment below. Let’s start a debate. I want to hear your convincing argument that investing in large caps makes sense. Because right now, all I see is a abuncha fools blindly dropping dollars in a losing man’s game.

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