In Investing, Is Bigger Better?

bigger fish

 

 

 

 

In investing, many tend to associate larger companies as “safer” investment. Is that really the case? Are companies with larger market capitalisation less risky than smaller companies? We look at the flaw in the assumption and why this belief can be extremely dangerous for investors.

A Low Risk Business Is not Always a Low Risk Investment

Companies operating in industries that can be considered as low risk such as consumers products such as tobacco or alcohol because they tend to have very stable growth and earnings. However, just being in a low risk business does not mean that the investment can be considered as low risk. Companies such as Guinness Anchor Bhd (GUIN: MK) saw its share price dropped from above RM21 per share to less than RM13 per share in the span of 2 years despite not suffering any major setback operationally. Its share price dropped more than 22.5% in this year alone. However, has its business suddenly transform to a more risky one? That is not the case. This just shows that even low risk business can faces times of high valuation or low valuation that has no relationship with its business.

Similarly, A Large Business Is Not Always A Low Risk Investment

Malaysia Airline System (MAS: MK) is the Malaysia’s largest airline for the past 50 years. Yet, its share price has been sliding for the most part of the last decade. For the past five years, it fell from about RM1.20 per share to the current RM0.22 per share. That is a drop of 82% in value for an investor. This shows that for a company facing a structural change in its industry model, it will affect both the large and small players.

Value In Action

I believe the takeaway of this little exercise should be the fact that investment should be made based on at least two very important analysis.

1) The economics of the business

2) Valuation

We have shown that large companies facing a change in its economics will still be affected. Just think of Eastman Kodex, Blackberry and Malaysia Airlines.

Secondly, valuation is an important part of investment. Although we do not need to have a crystal-like calculation of the valuation of a company, we do have to understand the risk if we buy into an overvalued company.

More on that next time.

Happy Investing.

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The information provided is for general information purposes only and is not intended to be any investment or financial advice.
All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim do not own any shares in the companies mentioned above.

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Founded by three investment professionals, we are bound by our belief in the concept of value investing. We want to share with you the idea of value investing and how it can be applied here in Asia. It has definitely changed our lives over the past decade. We hope it would help you in your journey of becoming financially free as well. Vision To become a key reference website for value investors interested in the Asian Stock Markets. Mission To spread the concept of value investing across Asia.

2 thoughts on “In Investing, Is Bigger Better?

  • July 19, 2014 at 11:16 pm
    Permalink

    Well would agree with you, however, many investors sometimes still avoid the smaller cap stocks despite the greater mos due to the fact of lower liquidity. My father for instance always find my stock recommendations risky as he fears that there might be a scenario where he is unable to exit the stock if fundamentals were to change etc.

    Reply
    • July 21, 2014 at 1:33 am
      Permalink

      Hi TL,

      First and foremost, we would like to thank you for having read one of our articles. You guys also have a great site there. Yup, liquidity tends to be an issue surrounding small cap investments, hence a double-edged sword for the retail investors. On the upside, institutional funds such as unit trusts tend to avoid these smaller-sized players due to mandate requirements, creating opportunities for us to take advantage of 🙂

      Regards,
      VIA

      Reply

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