Mythbusters
With episodes like, cannonball of cheese, boomerang bullet, and exploding turkey, Mythbusters is definitely one of the craziest shows on TV. Crashing vehicles, falling dummies, and lots (and lots) of things blowing up - it's no wonder this show is extremely popular.
Mythbusters centers on a cast of wacky hosts performing incredibly insane scientific experiments, with the hopes of deciphering whether or not urban legends could have been true. While the show can sometimes be filled with a bunch of utter nonsense, solving the truths surrounding age-old, puzzling urban legends is quite entertaining to watch.
On Wall Street there are also many myths that are just that - myths. Many of these myths hold some sort of merit. But many are preposterous! For example, we always hear that the average investor is unlikely to beat the pros. Well, this myth really depends on who's investing and what they're investing in. It's true, the average investor,haphazardly investing in mutual funds will likely not be able to beat the pros. But on the other hand, the investor that invests in high-quality businesses, at the right time, and tends to hold them for long periods of time, will most certainly beat the pros.
Another myth, with a lot of gray area, is if you start investing early in life you'll experience greater returns. In all honesty though, investing early does not always equal greater wealth. What if you are starting out at the top of a bull cycle, like the height of the tech bubble in 2000 where stocks were ridiculously over-inflated? You'd still be playing catch-up today. However, a prudent investor wisely waiting a few years for the opportune time and companies to invest in would have experienced some pretty impressive returns.
Are small caps really all that risky?
One myth that drives me batty is the notation suggesting small caps are far too risky for the average investor. While the Harvard economic professors will likely tell you - you'll lose your shirt, tail, and then some by investing in small caps, I say - hogwash!
Yes, small caps are an entirely different beast altogether. And it's true; investors have and will continue to lose a ton of money by investing in the stocks of smaller companies. But mind you, the risk you take with any investment is more so dependent upon the underlying business itself and not necessarily the size of the business.
The case for investing in small caps is strong. In 2009, Fidelity reported some great research showing that over the last 80 years small caps have averaged annual returns of 11.00 percent. In the same time frame, large caps have averaged annual returns of 9.10 percent. So there's plenty of money to be made by investing in small caps. Take a quick look at the chart on the next page and you will see some of the rewards of discovering smaller companies.
Throw in some common sense
The real problem with investing in small caps is most investors who do so, seem to throw common sense to the wayside. In my opinion, the small cap realm is plagued with a bunch of poker-playing gamblers who are comfortable placing their bets on chances, instead of hard facts.
Think about it; do you know of any investor who would buy a large cap stock without focusing on the firm's fundamentals? It’s amazing to me that when it comes to investing in the stocks of smaller companies it seems many investors focus entirely on the hype or story of the company, or stock price trends, completely ignoring the underlying fundamentals.
Why is this? You do not have to sacrifice all reasoning when investing in these smaller, undiscovered companies. You can truly find the best of both worlds by looking for small caps with large cap characteristics! The problem is it takes a lot of painstaking research and dedication that many investors nowadays do not have.
Start small, think BIG!
Think of this: large companies were once smaller companies - right? Wal-Mart WMT , Dell DELL, Intel INTC, McDonalds MCD, Microsoft MSFT, Cisco CSCO, and yes even Google GOOG all started out as tiny operations that few investors knew about. But amazingly, even with their small size, early on they exhibited real revenues and earnings, incredible managers, growing margins, increasing cash flows, great balance sheets, and in addition, they had phenomenal growth stories.
While the fruit of your labor for finding stellar smaller caps is well worth it, there is well documented evidence demonstrating a higher failure rate for smaller businesses versus more stable, larger businesses. What the data doesn't take into consideration is the overall financial health of these businesses before they failed. Once you throw in this data it becomes very clear that poorly managed companies with bad fundamentals make up the bulk of these failures.
Not too surprising is it? In fact, when you look at the supposedly "too big to fail" large caps that have failed, the similarities are striking as the majority of these large cap failures were poorly managed, in bad financial health, and their fundamentals were horrific. One key difference being, struggling large caps have more assets at their disposal and a much easier go at pulling in additional capital prolonging their survival.
As I stated before, the risk you take with any investment is more dependent upon the underlying business itself and not necessarily the size of the business. All investments carry a certain amount of risks and your returns will be directly dependent upon your ability to separate out the wheat from the chaff. If you can accomplish this feat, you can achieve exploding returns by investing in small caps. I'm not a certified mythbuster, but I for one think this myth is busted.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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