Have you ever faced a dilemma between investing in popular good quality companies and investing in unpopular small-cap companies? If you ever faced this dilemma, then you are not alone.
Why even do we face this kind of situation? The first reason that strikes is that investing in popular good quality companies ensures the safety of capital. And issues of these types of companies do not fluctuate much and even if it does we believe they will bounce to their original price.
If this is the situation that ensures the safety of capital, then why the dilemma? Well, as we have studied in economics “There is no such thing as free lunch”. What we referred to as good quality stocks, the valuation of these companies is already full and there is no arbitrage opportunity that can be exploited in these kinds of companies. In other words, all the factors which make them good quality have been already discounted in their price and there is no valuation gap.
On the other hand, if we look at small unpopular stocks there still can be a valuation gap and to exploit that valuation gap in order to gain more profit, we often see ourselves standing at a dilemma.
What should investors do?
Let’s go through a small article from “Security Analysis”
Now I think you know your answer theoretically. But let’s talk about what you can do. If you are an untrained investor as mentioned in the article (please do not get offended by the word "untrained"), you can invest a percentage of your portfolio in some good small-cap mutual fund. And the rest you can employ in “good quality stocks” with no long-term revenue and profit risk.
Until next time,
The Humane Opportunist.