Size
If you do not have much money to invest, you could turn it to your advantage by concentrating on small companies. These tend to be less will researched than large companies and so it is easier to find bargains here. But be aware of the spreads. Even at normal times they can be quite high but they become very high when unexpected news that moves the price is released. And the normal market size (or lack of it) may not allow any substantial investments at the quoted prices.
I made quite a lot of money relative to the capital that I then had by following small growth companies. Fortunately for me, they became the rage at one time when Jim Slater popularised PEGs and provided information for the private investor to use it by subscribing to Company REFS.
I am now no longer interested in anything other than FTSE100 and a few large mid-cap companies as the normal market size of the smaller companies is too small to enable me to make a worthwhile investment in them. However, for those who have less capital to invest, I give below quotes that suggest that investing in smaller companies may be to the advantage of investors with less capital:
Buffet
A fat wallet is the enemy of superior investment results. Though there are as many good businesses as ever, it is useless for us to make purchases that are inconsequential in relation to [our] capital.
Lynch
When Magellan grew into a medium-sized fund, it got harder for me to make a meaningful investment overnight. Once in a while I got the chance to gobble up a huge block of shares from an institutional buyer, which is how I acquired.... But these were the exceptions to the rule of constant nibbling. Every time the fund got bigger, I had to add to each position to maintain its relative weight versus the other stocks in the fund. With the smaller stocks specially, it sometimes took months to acquire a decent amount. If I bought shares too rapidly, my own buying would cause the price to increase beyond the level at which I would have wanted to start selling.
Bigger funds are forced to limit themselves to the top 90 to 100 companies out of the 10,000 or so that are publicly traded. That cuts out a lot of opportunities, especially in the small fast-growing enterprises that tend to be tenbaggers.
O’Shaughnessy
Small-cap mutual funds justify their investments with academic research showing that small stocks outperform large ones, yet the funds themselves cannot buy the stocks that provide the lion’s share of performance because of lack of trading liquidity.
Michael Price
The market gets closer to being efficient when it involves more normal, well followed large cap stocks.
Stephen Lofthouse
Studies show that stocks followed by few analysts or held by few institutions outperform by a wide margin. Given the limited diversification of private investors, the extra return from neglected stocks may be a reward for both unsystematic risk and systematic estimation risk. Investors who buy a basket of neglected stocks will get an investment free-lunch.
Charles Ellis
Be sure you are playing your own game.
Admiral Morrison: Impose upon the enemy the time and place and conditions for fighting preferred by oneself.
Armour: Play the shot you’ve got the best chance of playing well.
Market liquidity is a liability rather than an asset, and institutional investors will, over the long term, under-perform the market because money management has become a Loser’s Game.