How “Going Small” can boost your investment portfolio
With going small, I’m of course referring to small cap shares, and more specifically a subset called “Penny Shares”.
These are companies with market values typically lower than R5 billion and share prices below R10.
It makes sense that small and growing companies can be spectacular investments. It's much easier for a company with R100 million in sales to grow sales and profits than it is for a large company that already dominates its market.
When you compare the returns of the JSE All-Share Index to that of these small companies, it becomes evident that the small companies outperform.
Have a look at the chart below for example. It shows the performance of my Red Hot Penny Shares portfolio since 2011, compared to that of the JSE All-Share Index.
Penny Shares SERIOUSLY outperformed the market between 2011 and 2016
In short, if you’d followed all my small-cap share recommendations, you’d have made an average return of 28% a year.
Invested in the broader JSE market, that return would’ve been much lower at 8.27% over the same period.
Over the long term, the performance is even more amazing.
Small-Cap Index beats the JSE All-Share hands down over the long run
In this chart you’ll see how the JSE Small-Cap Index made a 1,009% run in the past 20 years, compared to the JSE All-Share Index that did only 678%.
That’s a massive outperformance for such a period.
In fact, had you invested R100,000 in small shares like the ones on the Small-Cap index in 1996, your money would be sitting at R1,100,787 today. On the JSE All-Share index the same investment would be worth R770,842. That’s a difference of R329,945. Enough money to buy a car cash, or as a major down-payment on a house.
This long-term outperformance of smaller companies is well known to big investors...
In fact, legendary investor and Berkshire Hathaway CEO Warren Buffett has bemoaned that he simply has too much money to make the kind of 50%-plus returns, he enjoyed when he got his start investing with less than $1 million.
This type of "going small" strategy is a huge advantage that you have as an individual investor...
It's not easy to find small companies with strong growth prospects. You have to uncover their niche... Research the management... Study the debt structure... Weigh risks... And identify whether their growth is sustainable.
The simple solution is to invest in a lot of small companies. This diversifies your risk. But you don’t necessarily have the cash to invest in all of them.
If you focus on established companies like I do at Red Hot Penny Shares, it narrows down the market from a couple of hundred shares to only one or two top shelf shares a month!
Here’s to unleashing real value