For some reason the great majority of people seem to think that bigger is universally better. Perhaps if you are buying a chocolate muffin (although a nutritionist would argue with me on this point) or drafting an offensive lineman, bigger is, in fact, better. But if you are investing, on the other hand, I think its much more advantageous to be small fish.
The first--and most obvious reason why this is true--is that the smaller amount of money you have to invest, the greater the universe of opportunities available to you. Berkshire Hathaway Chairman Warren Buffett mentioned this at the last few annual shareholder meetings, when he said he would be doing a lot different things with his capital if he only had $50 million or less to invest, rather than the billions he has to deploy at Berkshire. While he is busy looking for elephants, the majority of folks with much smaller amounts of money can spend time looking under the tiniest of rocks for new investment ideas. This is a huge advantage.
The second reason—although it is closely linked to the first—is that it is much easier for investors with smaller amounts of money to move the needle on their net worth. A company like Berkshire--or perhaps more poignantly a large mutual fund or hedge fund—can have so much capital, that even when they find a good idea, it will hardly ever have the potential to dramatically increase the overall size of their assets. Whereas an investor with only 100,000 dollars to invest, could find several opportunities in today’s markets to potentially double the size of her assets.
The irony is that most mutual funds or other asset managers routinely advertise the amount of their firm’s assets under management. I suppose they believe that the more assets they have—i.e. the bigger they are—will give them the credibility necessary to attract even more assets. And generally, it does. But, in my opinion, this approach incongruous to generating decent long-term returns, as the bigger these firms become, the more modest their overall results will generally be. This isn’t just me pontificating. It is basic mathematics, as size is generally negatively correlated to investment returns.
I’d even take this one step further, and argue that given the role that large financial firms played in the recent market maelstrom, size doesn’t even confer trust to clients anymore. What matters more, in my opinion, is a personal relationship, and the ability to pick up the phone and talk to someone who explains things plainly and honestly. It is not about a big brand or a big size, but rather a single relationship that creates trust among clients. I’d further postulate that now that the tide has gone out on several of the larger firms and money managers, even more folks will find that smaller is, in fact, better.
Now, I’ve painted some large brush strokes, and certainly not everyone is covered. There are many firms that do limit the size of their assets, which helps to ensure that their universe of potential investments is adequate. Other firms choose to stay small so that they can better serve their clients, and attempt to keep their returns better than average over the long haul. I applaud each of these approaches.
But the real benefactors of being small, in my opinion, are still individuals. If an individual doesn’t have the time to invest, they can try to seek out the type of firm I’ve just described above. If an individual does have the time to do the work on their own investments, though, typically looking for smaller companies that one can understand (i.e. within their circle of competence), can help them to produce long-term results that most professional money managers could only dream to replicate.
You might also be interested to know that buffettologist.com was recently mentioned in a New York Times article, which I’ve linked here.
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
