Investment Strategy

Summary

In Wangchuk Capital, LLC’s opinion, by limiting investments to well-known (large capitalization) and widely-held stocks (i.e. GE, IBM, PG, etc), investors will yield average/market- level returns. To outperform the market, an investor must be willing and able to invest in the smallest of companies. Non-traditional equities such as micro-cap stocks (domestic and international) offer investors the opportunity to earn above-average returns while taking less risk. WC’s mission is to intelligently create a low-risk portfolio that outperforms the global stock indexes by investing in securities that have a small market capitalization and are attractively-priced.

In Wangchuk Capital, LLC’s opinion, by limiting investments to well-known (large capitalization) and widely-held stocks (i.e. GE, IBM, PG, etc), investors will yield average/market- level returns. To outperform the market, an investor must be willing and able to invest in the smallest of companies. Non-traditional equities such as micro-cap stocks (domestic and international) offer investors the opportunity to earn above-average returns while taking less risk. WC’s mission is to intelligently create a low-risk portfolio that outperforms the global stock indexes by investing in securities that have a small market capitalization and are attractively-priced.

 

 Warren Buffett on Investing Small Sums. iii

The details

 

Background

Investors in U.S. stocks (as of January 2014) could choose from among nearly 4,000 different companies with market capitalizations over $250 million. By contrast, there are over 8,000 domestic companies with market capitalizations below that threshold. The micro-cap segment of the market offers a more diverse set of opportunities, though the small size of the components makes the segment nearly un-investable for institutions and others with hundreds of millions under management. Historically, investors have been well-rewarded for investing in these smallest companies. From 1926 to 2013, the smallest decile (1/10) of U.S. stocks returned 12.91% annually, while the largest decile (1/10) returned 9.37%. i

 

Why should I invest in small capitalization companies?

Institutional investors value liquidity and prefer the ability to liquidate any holding within a short time frame (i.e. minutes & hours). As a result, securities that require a larger time commitment to liquidate often trade at significant discounts from fundamental value. Historically, the market has rewarded investors that are willing to purchase thinly-traded stocks. From 1972 to 2010, the average annual return premium for the lowest liquidity quartile of the 3,500 largest US companies stocks compared to the highest liquidity quartile of the same stocks was 5.34%. ii

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Why international stocks?

There are three reasons to consider international investing: diversification, growth and a more extensive set of opportunities.

International investment returns can move in a different direction than U.S. market returns, thus investing internationally could help guard against some of the risks associated with a U.S.-based portfolio. With a portfolio that includes domestic and foreign stocks, investors could potentially reduce the risk of losing money if U.S. markets decline.

Investing internationally also lets you capture investment opportunities that arise from fast-growing economies and markets whose currencies are appreciating against the dollar.

At the end of 2013, the U.S. remained the largest stock market – 48% of the global market.  Despite this astounding figure, an investor with a global approach had twice as many investment opportunities when compared to an investor who only invested in U.S. equities.

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Conclusion

In Wangchuk Capital, LLC’s opinion, by limiting investments to well-known (large capitalization) and widely-held stocks (i.e. GE, IBM, PG, etc), investors will yield average/market- level returns. To outperform the market, an investor must be willing and able to invest in the smallest of companies. Non-traditional equities such as micro-cap stocks (domestic and international) offer investors the opportunity to earn above-average returns while taking less risk. WC’s mission is to intelligently create a low-risk portfolio that outperforms the global stock indexes by investing in securities that have a small market capitalization and are attractively-priced.

For those interested in learning more about the excess returns generated by investing in small-cap stocks, Tweedy, Browne Company LLC has published a comprehensive study.

 

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Sources:

i. On Long-Term Returns of Micro-Cap Equities Data

ii. On Long-Term Returns of Illiquid Stocks

iii. Warren Buffett on Investing Small Sums