What has Worked in Investing? Part-2

As the continuation of our earlier post (Part One), we are going to briefly discuss the second characteristics of every historical successful investment (based on our research).

Small market capitalization is the second common characteristics of successful investment after the price paid for assets.

Small Market Capitalization

Wonderful business bought when they are small will deliver a huge return. They, indeed, are called 100 baggers. Many multi-millionaires and multi-billionaires are the results of this.

It is evident that smaller companies have a longer runway, therefore they have a higher probability of astounding growth.

If a company has right service or product, the global market share is its playing field. Also, a smaller number multiplies faster than a bigger number!

Small Number

0.1 * 2 = 0.2 (An increase of 0.1 doubles the number)
0.1 * 4 = 0.4 (An increase of 0.3 quadruples the number)

Big Number

100 * 2 = 200 (An increase of 100 doubles the number)
100 * 4 = 400 (An increase of 300 quadruples the number)

No wonder why penny stocks are very popular. Maybe for a right reason.

Consider an example of Amazon. Amazon is now selling for $875 billion. If you invest your capital in Amazon now, and you intend to double your investment. For that, Amazon’s market capitalization should be $1.75 trillion. Almost two trillion. Its not impossible but certainly arduous.

Consider if you have bought Amazon while it’s market cap was in few billions. Or in 1997, during its IPO, when it’s market capitalization was $438 million. It certainly will be relatively easy to double and triple in value. It is the rule of a small number. It’s math!

In 2006, Amazon was selling for $13 billion dollars. An investor who bought Amazon in 2006 saw his investment doubled at $26 billion market cap and quadrupled at $52 billion market cap. Now, Amazon sells for $875 billion.

Now consider a hypothetical company selling for $2 million market cap. And it does so well and after 10 years, it sells for $2 billion. This does happen! Assuming you have invested $10,000 at $2 million market capitalization. Now, you will have $10 million. This is an astounding growth of 99,900%, which is seemingly impossible for a company of Amazon’s size. Amazon already had that growth!

Final Though

Although the companies with smaller market capitalIzation dispense higher investment return, they are also highly risky. If you know what you are doing, perhaps you should only buy companies with smaller market cap.

By and large, if you could find any smaller companies with a great future prospect you should back up your truck to load’em!

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