Big, Small or Mid-Cap?

I've been thinking about whether investing in big, mid or small cap companies would be the most beneficial for us. I guess that while picking good investments will involve us investing in different sizes of companies (good investments don't only come in one size), but there may be characteristics of certain size of companies that would fit our investing goals better than others.

Big-caps are usually more stable and would be able to deliver stable returns, which when purchased at a reasonable price would be able to give us good returns, but then they are not impervious to competition from the small and mid-cap companies that may grow to overtake it as the leader of their respective industries and sometimes sell at a higher P/E ratio due to their perceived safety. Big giants such as Lehman Brothers have also collapsed in the 2008 financial crisis and may also face threats from some of their smaller, more-efficient competitors, so not really sure of their perceived stability and safety anymore. Some of the companies that I've covered that I think fit into this category include Yangzijiang, SGX and Jardine C&C

Mid-caps remind of the middle class, supposedly an aspirational category, where some of them will be able to grow on the overtake the big caps and become the big caps themselves. If we are able to invest in some of these good companies, we will get very good returns as we get the quality of a blue chip at a fraction of the price, which we can then sell or hold as a big cap which would lead us back to the previous paragraph. But then again, they may fail when one of the big caps come after their business, one example being Creative (guess it could be a big cap at its peak), whose Sound Blaster sound card that made it famous, became less popular after Intel introduced their own chip sets and now its shares sell at a very small fraction of their peak and has lost money for 3 of the last 4 years. Some companies that I've covered in this category would be Haw Par, the public transport operators and UOB Kay Hian

Small-caps can be seen as the riskiest among the three categories as decisions made by the big and mid caps can utterly crush their business. Unless the company has a definite economic moat that their larger counterparts cannot overcome with sufficient resources and manpower, they can be easily overtaken by them when they start to experience success in their industry, possibly forcing them to close down. Some of the small-cap stocks are also have more speculative value than investment value as they turn year after year of losses while investors still continue to buy their shares. I think I've only covered one company in this category which is Colex

That sums up most of my thoughts on the different sizes of companies. Usually I would prefer mid-cap companies as I think that they're less risky than small-caps while less analyst coverage then the big caps presents good opportunities for undervalued shares which can be picked up at a fraction of their value. But this is a more personal view that would vary from person to person, but as mentioned at the start, good investments can come in different sizes so no one is actually "right" per se.

If you have enjoyed this post and would like to receive notifications on new posts, please subscribe to my blog via email