I think we all suffer from it to some degree. Even though I’m focused on small caps, and want to stay focused on small caps, I can feel those forces pulling me toward large caps, and I have to actively fight them.
To be completely honest, reading your great analyses sometimes contributes to that too (I’m thinking in particular of HEICO).
"You inherit your investing universe". Thanks for sharing this great read!
You got to the root of biases that lead investors to choose their "ponds" (large cap vs small cap). Most times, it has nothing to do with risk and everything to do with comfort (what we have always known) and availability.
Most people say small caps are "too risky," but as this post points out, that’s usually the right answer to the wrong question. If you "control your junk" and filter for quality, the size premium isn't just a theory—it’s a massive edge that most active investors are too "culturally blind" to see.
Question: Do you think the perceived safety of a Large Cap name is worth the "Alpha destruction" of competing against the smartest, best-funded algorithms on the planet?
As you said, it’s all about perception (“perceived”), so from that point on it’s impossible to give a universal answer.
In my view, the best heuristic is to choose the investment approach that minimizes the likelihood of biases leading to value-destructive behavior.
For some people, the volatility and perceived risk of small caps can trigger “irrational” decisions that destroy more value than if they had simply stayed in large caps. So the answer to your question ultimately requires some serious self-reflection from each person.
Great point. Investors' egos forces them to try to answer the tough questions, but that isn't where the biggest expected return is
Wow great post! I think I'm suffering from large cap cultural blindness.
Thanks a lot, TPC!
I think we all suffer from it to some degree. Even though I’m focused on small caps, and want to stay focused on small caps, I can feel those forces pulling me toward large caps, and I have to actively fight them.
To be completely honest, reading your great analyses sometimes contributes to that too (I’m thinking in particular of HEICO).
"You inherit your investing universe". Thanks for sharing this great read!
You got to the root of biases that lead investors to choose their "ponds" (large cap vs small cap). Most times, it has nothing to do with risk and everything to do with comfort (what we have always known) and availability.
Thanks for the feedback!
The “upside” is that, as you imply with “we,” almost all of us are affected by this, and a bit of introspection was enough to do most of the analysis.
Hello!
Most people say small caps are "too risky," but as this post points out, that’s usually the right answer to the wrong question. If you "control your junk" and filter for quality, the size premium isn't just a theory—it’s a massive edge that most active investors are too "culturally blind" to see.
Question: Do you think the perceived safety of a Large Cap name is worth the "Alpha destruction" of competing against the smartest, best-funded algorithms on the planet?
Hi,
As you said, it’s all about perception (“perceived”), so from that point on it’s impossible to give a universal answer.
In my view, the best heuristic is to choose the investment approach that minimizes the likelihood of biases leading to value-destructive behavior.
For some people, the volatility and perceived risk of small caps can trigger “irrational” decisions that destroy more value than if they had simply stayed in large caps. So the answer to your question ultimately requires some serious self-reflection from each person.