Yesterday, in Part I of our special Easter Weekend series from Senior Market Analyst Brian Hunt, we looked at why the greatest investment opportunities often hide where few bother to look.
Today, in Part II, Brian reveals the real reason the world’s wealthiest investors can’t touch these hidden gems – and how that gives you an almost unfair advantage.
You’ll discover why institutional giants are forced to ignore the very places where the biggest growth lives, and how their absence opens a far less crowded, far more lucrative Easter egg hunt for savvy individual investors.
If you want the edge in today’s hyper-competitive market, this is a must-read.
I’ll let Brian take it from here in Part II of “What Kind of Easter Egg Hunt Are You In?
Have a wonderful Easter Weekend,
Jeff Remsburg
The Problem of Size
In the investment world, professional investors obsess over “liquidity.”
When it comes to buying and selling investments, liquidity is a measure of how easy or difficult it is to transact in a security.
For example, take Amazon stock. Because Amazon is one of the world’s largest companies (worth over $983 billion in 2022), and since many people like to buy and sell its stock, we can say Amazon stock is “very liquid” or “has huge liquidity.”
There is a large market for Amazon stock where buyers and sellers execute many sales each day. In 2022, it was common to see over 70 million shares of Amazon change hands in a day.
On the other side of the spectrum, take an unknown small-cap firm with a market cap of just $50 million (less than one-tenth of one percent of Amazon).
Because this company is tiny by stock market standards, and since most people have never heard of it, the company’s stock will not have much liquidity.
Remember, market cap is simply the number of outstanding shares times the share price. That means with small-cap stocks, there simply aren’t all that many shares out in the market (compared to, say, Amazon, which we just talked about). This makes it harder for someone to buy up a huge amount of those shares – there may not be all that many sellers.
Now here’s where it gets interesting…
Let’s say you manage a $10 billion stock portfolio.
For a stock position to make a meaningful positive impact on your fund’s results, you need it to represent at least 3% of your fund’s assets.
Most good managers would rather put 4% to 8% of their fund into a stock idea they believe is truly great.
If you’re looking to put 3% of $10 billion to work in a great idea, that means you are looking to place $300 million.
That is six times more money than a $50 million small-cap.
Even if you wanted to put just 1% of your fund into a stock, that is $100 million.
You get the idea.
Big money managers can’t join in the small-cap stock Easter egg hunt.
They also can’t “play” in other small markets with limited liquidity, like many options markets, smaller investment funds (like closed end funds and ETFs), individual bonds, small-cap foreign stocks, and penny stocks.
When you “play” in small markets with modest liquidity, you don’t take on the world’s richest, most powerful institutions armed with armies of topflight analysts and the world’s best computers.
Instead of competing against thousands of other Easter egg hunters, you compete against modest amounts of them.
Think of it like you would buying a house. You want to be a buyer in an area with just a few other buyers… instead of being a buyer in a town where lines form down the block after homes go on sale. When you’re a buyer, you don’t want loads of competition.
I can’t resist rolling out one more analogy to get you on board:
Think of it like fishing. You don’t want to fish in the same spot as 1,000 other anglers. You’d rather have a quiet stream and its fish all to yourself.
Successful investing and trading is all about tilting the odds in your favor.
The more you can get this advantage, the more successful you will be.
Hunting in smaller, less liquid markets – like the small-cap market – is one of the best ways to do that.
Regards,
Brian Hunt
Senior Analyst, InvestorPlace
P.S. – Here’s how to find the best small-caps poised for one-month gains
As you may know, we’ve been following the AI megatrend for a long time now.
That’s why I was intrigued when I learned that our corporate partners at TradeSmith released an AI algorithm that can forecast prices one month into the future.
Imagine having access to the same kind of AI-powered predictive capabilities previously available only to elite Wall Street firms. I can’t think of a more valuable tool to have in a chaotic market like this…
That’s why TradeSmith CEO Keith Kaplan hosted The AI Predictive Power Event earlier this week – so that regular investors can profit during the chaos… instead of fearing it.
If you didn’t get a chance to attend, click here to start watching the replay now.
