How to Beat the Market by 749%…

Welcome back to your Extreme Small-Cap Profits email course. You’re now up to Day 3 of 12.

If you missed my email yesterday, we talked about why small-cap investing is the best strategy for individual investors (like you) to make a fortune in the market.

For large investors, on the other hand, small-cap stocks aren’t all that useful. Their size restricts them from jumping in and out of smaller stocks.

Thus, they ignore small-caps completely, leaving a boat load of opportunity in the small end of the market.

Today I’ll show you ‘the market’ in a bit more detail. We’ll take a look at what makes up the market: small-caps, mid-caps and large blue chip stocks.

We’re also going to take a look at performance (small versus large).

The plan is to reaffirm why investing in small-caps with only a small sum is your best bet to massive stock market profits.

Ready to jump in? Let’s do it.

Returns aren’t bad from the mid-caps

OK, so we’ve covered the basics of small-caps. You know their size and which investors should be sticking to small-caps.

But if small-caps are companies under a billion dollars, what does that make everything else?

The other two types of stocks are mid-cap and large Blue Chips.

Let’s take a look at mid-caps first.

These companies usually range in size from $1­–$10 billion.

A stock like a2 Milk Company Ltd [ASX:A2M] is a mid-cap.

The milk and infant formula company has a market cap of $5.8 billion.

Like small-caps, mid-caps can be a great opportunity for investors who want growth. As the business continues to grow, investors could potentially double or even triple their investment within a year.

a2 Milk is a perfect example of a high growth mid-cap stock.

The stock more than doubled last year, climbing 261%.

Money Morning Chart | 17-04-2018 Source: Google Finance
[Click to enlarge]

The share price climb came largely from a2 Milk’s rising sales in Asia. As you many know, infant formula is big business in China.

Hundreds of brands jostle to get their product on Chinese shelves. They all want to be the first choice of Chinese consumer’s.

Among its international competitor, a2 Milk has an advantage — the power of a New Zealand brand. Thanks to that and a2 Milk product range, the company is growing sales by 70%.

Money Morning Chart | 17-04-2018 Source: a2 Milk 2017 Annual General Meeting
[Click to enlarge]

I’ll talk a bit more about the numbers behind the business in the coming days. But for now, let’s get the basics down pat.

Large blue chips aren’t all that safe

Now, let’s look at the large blue chips.

These are usually companies with a market cap of $10 billion and over.

Some typical blue chips are BHP Billiton Limited [ASX:BHP] and Commonwealth Bank of Australia [ASX:CBA].

BHP has a market cap of $156 billion and CBA has a market cap of $139 billion.

Both usually don’t move more than a few percent each day. Even within a year, it’s hard to double your investment on blue chips.

The last time CBA doubled within a year was back in 2009. CBA followed the market down as it crashed. And from January 2009–10, the stock rebounded more than 100%.

Money Morning Chart | 17-04-2018 Source: Google Finance
[Click to enlarge]

It’s these stocks that large institutional investors stick to. Not only do blue chips offer the opportunity to get in an out with relatively large sums of money. They’re also perceived as less risky.

The reasoning goes: BHP and CBA are safer than a2 Milk because they’re larger. They can get better loan terms and they have massive operations, which have been running for decades.

But most importantly, stocks like BHP and CBA are far less volatile. Meaning the share price of BHP and CBA moves around far less than a2 Milk.

This definition of risk is, of course, ridiculous. Just because a company is large and has low volatility, doesn’t make it less risky. 

It just makes it easy for nervous investors to sleep at night.

Truth is, it’s just as easy for blue chips to fall flat on their face as it is for smaller companies.

Just take a look at Telstra Corporation Ltd [ASX:TLS].

Australia’s biggest telecommunications company has been a net loss for shareholders who bought in during the late 1990s.

Money Morning Chart | 17-04-2018 Source: Google Finance
[Click to enlarge]

At one point, initial investors were down more than 69% on their investment…definitely not my definition of safe.

Why you should love volatility

It’s no secret that small-caps stocks are far more volatile than blue chips.

Vita Group Ltd [ASX:VTG], which we saw in Day 2, was worth as little as 90 cents and as much as $3.65 per share in 2017.

That’s more than a 75% difference in price within the same year. In contrast, CBA’s price range in 2017 was a little over 19%.

Taking this into account, maybe small-cap investor isn’t for you.

If you stress about your positions going up or down on a daily or monthly basis, maybe investing in blue chips is more your style.

However, not being able to stomach volatility means you’ll miss out on massive potential returns.

Even if you go on averages, a group of small-caps tend to outperform a group of blue chips.

Take a look at the chart below.

Money Morning Chart | 17-04-2018 Source: Bloomberg
[Click to enlarge]

I’ve created a model (orange) that buys stocks on the ASX which are below $1 billion in size.

This model rebalances each year. Meaning it buys and sells stocks based on that range annually.

As you can see, following such a method would have worked out pretty well in the long-run. The total or cumulative returns from 2000–17 were 1,138%!

Over the same time the All Ordinaries (the 500 largest Aussie stocks) only climbed 389%.

Buying small stocks, on average, outperforms buying Blue Chips by more than 749%.

Of course there was far more volatility in getting to that 749% outperformance. But at the end, it was clearly worth it.

You would have turned a few thousands into hundreds of thousands.

As I said in Day 2, small-cap investing is perfect for the individual investor. All you have to do it stomach the volatility and over time you could be far better off.

That about does it for Day 3 of your Extreme Small-Cap Profits email course.

Stay tuned for Day 4. I’ll discuss how to approach small-cap investing, what you need to look for and how to avoid pitfalls.

Until then.


Härje Ronngard,
Editor, Money Morning

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia