Large investors have enormous amounts of capital. Individual investors have flexibility.
A fund managing tens of billions to hundreds of billions of dollars cannot meaningfully invest in many small companies because the investment size would not move the needle for the portfolio. An individual investor managing a much smaller portfolio does not have this limitation.
This creates an interesting opportunity. The same constraint that limits large institutional investors can become an advantage for smaller investors.
However, the ability to invest in small companies is only useful if the investor has the ability to identify quality businesses among thousands of weaker ones. This is where experience matters.
Small-cap quality investing is not simply about buying small companies. It is about finding exceptional businesses before they become widely recognised by institutional analysts and investors.
The Difference Between Buying Small Companies and Finding Future Giants
Many investors misunderstand small-cap quality investing. They assume that investing in small companies automatically creates higher returns. This is not true.
A small company can remain small forever. Some small companies are small because they operate in difficult industries, have poor management, weak competitive advantages, or limited growth opportunities. Size alone does not create an investment opportunity.
The real opportunity comes from a mismatch between the quality of the business, its future potential, and the market’s current expectations.
A company may look ordinary today but possess the characteristics of an exceptional business tomorrow. The market may underestimate the size of its future market, the strength of its competitive advantage, the quality of its management, the speed of customer adoption, or the sustainability of its growth.
This is where investors can potentially generate superior returns. The goal is not to find companies that are merely small. The goal is to find companies that are small today but have the economic characteristics to become much larger tomorrow.
Buffett’s Lesson: Capital Size Changes the Game
Warren Buffett has often explained that investment opportunities become harder to find as the amount of capital under management increases.
When Buffett was managing a much smaller amount of money, he could invest in companies that were too small to matter to today’s Berkshire Hathaway. A $50 million company could potentially provide very meaningful returns to a very small portfolio. However, for a company like Berkshire Hathaway, a complete investment in such a company would have virtually no impact on overall returns.
Faces a capacity problem. As assets grow larger, investors are forced toward larger companies, and the opportunity set becomes much narrower.
Does not need to compete directly with billion-dollar funds. They can search in areas where institutions cannot easily participate.
This explains why Buffett achieved extraordinary returns during his earlier decades when he could invest in smaller companies and special situations. This does not guarantee success. But it creates a structural advantage.
Why Experience Matters in Small-Cap Quality Investing
A common argument against small-cap quality investing is that smaller companies are riskier because there is much less information available. There is truth in this. Small companies often have:
However, this is where experience becomes valuable. An investor who has spent many years studying large companies develops an understanding of what makes a great business. They learn to recognise:
These lessons are transferable, as experienced large-cap quality investors can look through the old annual reports of great companies in their investment portfolios to see recurring patterns in the transition from small-cap to large-cap for their stock positions.
The company size changes. The principles do not. A great business is still a great business whether it has a market value of $500 million or $500 billion. The experienced investor’s task is to identify those qualities before the market fully appreciates them.
A Personal Example: Identifying iFAST Before the Market Recognised Its Potential
One example from my own investment experience was iFAST Corporation (SGX: AIY).
I first identified iFAST in April 2015 when it was still a small-cap company with limited institutional attention. At that time, my investment thesis was not based simply on valuation. The opportunity was based on an understanding of a structural change occurring within the wealth management industry.
What attracted me was that iFAST’s investment platform was highly innovative for that period. The company was positioned to serve a new generation of investors. These investors were different from previous generations. They were highly educated, comfortable learning about investing and finance independently, more technologically capable, and increasingly interested in managing their own investments rather than relying entirely on traditional financial advisors.
The investment world was undergoing a major change. Technology was reducing barriers to investing. Information was becoming more accessible. Investors were becoming more independent.
Platforms that could provide convenient access to investment products, information, and portfolio management tools were positioned to benefit from this long-term trend. My investment thesis was that iFAST was aligned with this structural shift. The company was not simply selling an investment platform. It was positioned around a broader change in investor behaviour.
The potential market opportunity was significantly larger than what many investors initially recognised.
Not “how large is iFAST today?” but “what happens if this emerging investor behaviour becomes mainstream?”
If the answer was that a large number of investors would increasingly take direct control of their investments, then companies serving this trend could experience significant growth.
The iFAST position
Over the following years, the company developed from a relatively under-followed small-cap company into a recognised growth company and eventually became a multi-bagger investment.
However, investing is not only about knowing when to buy. Knowing when to sell is equally important.
I exited the entire position on 28 January 2021 with a 274.83% return because I believed the stock’s valuation had moved substantially ahead of the company’s intrinsic value and reasonable projected expectations for medium- to long-term growth. Subsequently, the stock produced much less spectacular returns for the next five years until today.
This reinforced an important investing lesson: many times, a successful investment requires both a good entry decision and a disciplined exit decision.
The only exclusions are for true compounder stocks that comprise less than 0.5% (0.005 in decimal points) of all the stocks in a country’s stock market.
The Individual Investor’s Hidden Advantage
Large institutions have advantages: big research teams, greater resources, access to management, sophisticated analytical tools.
However, individual investors possess advantages that institutions cannot replicate. They can:
Invest in much smaller companies.
Hold concentrated positions.
Wait patiently.
Ignore short-term market pressure.
Avoid forced selling.
Most importantly, they can focus only on the best opportunities. They do not need to own hundreds of companies, unlike many very large institutional funds. They only need a few exceptional investments where their understanding is significantly better than the market’s.
The Journey from Large Caps to Small Caps
For many investors, studying large companies is the correct starting point. Large companies provide cleaner information. Many of their business models are easier to understand. Their competitive advantages are often more visible. They allow investors to learn the fundamentals of business analysis.
After years of experience, investors can begin applying the same principles to smaller companies. The objective is not to abandon large companies. Large companies can still produce excellent returns.
The objective is to expand the opportunity set. A skilled investor should be able to evaluate businesses across different sizes and identify where the greatest gap exists between reality and market perception.
The Final Lesson: Look for Tomorrow’s Leaders Today
The greatest investment opportunities often appear before the majority of investors recognise them. By the time everyone understands that a company is exceptional, much of the return may already have been earned.
The challenge is developing the ability to identify quality early. This requires:
The objective is not to find the smallest company. The objective is to find the company where the future is much brighter than the present valuation suggests.
The most attractive opportunity may be a small company that already possesses the economics of a large company. A company that has not yet become obvious.
A company where the market is not looking at it today, while the investor is looking at what it can become tomorrow. That is the essence of finding future multi-baggers when they are small-cap and mid-cap companies.