Key insights
- The post discusses the potential advantages and disadvantages of investing in micro-cap and small-cap companies, highlighting the reduced competition from large institutional investors but also acknowledging the increased risks such as lower liquidity and higher volatility. Overall, the post is neutral, simply exploring an investment strategy.
I’ll preface this by saying I’m relatively new to stock picking, so apologies if my questions—or the premise of this post—come across as a bit noob-ish. Real estate has been my primary focus, but I figured it’d be fun to dabble in equities; I’ve always been intrigued by Warren Buffett and value investing principles.
I’m really looking for people to poke holes in my thinking. The investment thesis I’ve been mulling over is focused on identifying micro-cap or small-cap firms with strong fundamentals.
Large institutional investors—hedge funds, mutual funds, pension funds—manage billions of dollars. When they find a stock they like, they need to buy enough of it to meaningfully impact the fund. As a result, their investable universe is constrained by their size.
Warren Buffett offers a hint in a 1999 interview:
"Anyone who says that size does not hurt investment performance is selling. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that."
So why try to compete directly with these large firms? Why not focus on the $50M–$300M market cap range (arbitrary, but illustrative), where there’s way less competition? A 100% bump on a $50M firm is a rounding error for Berkshire but a regular guy can still make life-changing money on it.
Now, I understand there are risks: less liquidity; stocks might be cheap because business is genuinely declining; less coverage/public research; volatility; etc. And, perhaps I'm not giving these enough weight and that could be the answer to my question. You tell me.
But the idea would be to find these smaller companies with a proven track record of strong free cash flow, low debt, and solid ROIC—businesses that most investors simply aren’t paying attention to. Perhaps many lurkers here are looking at these smaller companies, but it seems like the vast majority of posts and discussion focus on companies like Google, Micron, or other large-cap firms. I rarely see people discussing positions in small-cap or micro-cap companies.
Genuinely—what am I missing?