Hi Klogg, an excellent stock picker can beat the market at the...

Hi Klogg, an excellent stock picker can beat the market at the small end. Though even investment houses with robust stock selection frameworks seem to be struggling at the moment. Look at forager, DMX or EGP for example*. All excellent investors but not always smashing the market. However, I know you have sound methodologies and have done well here.

Though the purpose of this post was not to argue the point, because an excellent investor should do well at the small end. Instead my investment decision was driven by a large amount of my own data. I have a watch list with around 600 ASX listed companies - pretty much all of the profit making companies, minus a few mining stocks. My detailed data has only been collected over a 3 year period, but I have imaginary portfolios that monitor returns from 50 stock groupings based on size. My conclusion is pretty simple, 50 - 300 has outperformed the top 50 and 300 - 600 by a huge margin. The top 50 had meaningful out performance over 300-600. Companies in the 300-600 were most of the profit making micro caps. I may have missed a few micro caps, but the results were cut and dry for me.

I realise an argument could be made that the time period in this experiment was too short. However, when I look back further - all the way back to the GFC - the data backs this trend. The GFC is difficult to analyse, but I do know micro caps performed very poorly through this period. Micro caps generally seem to do poorly, with a few exceptions that absolutely smash the market. If you are good enough to get these few needles in the haystack, go for it. Even picking seemingly sensible, undervalued companies at the small end doesn't seem to be enough, just look at forager of late. Some of it is the market, but I think the other factor is that cigar butt investing is competitive and a number of stock pickers are scouring this end of the market. I have come to realise, between working for a living and having a family that I can't compete effectively with these investors. Instead most of my success has come from buying mid/small cap companies that are good quality. These companies seem to keep on performing and growing earnings, whereas my 'value' picks have kept downgrading earnings and shrinking the pie over a number of years.

Probably every investor needs to find their own style that works for them. I have only been doing this for 6.5 years and I am still developing what works for me. Strangely, being able to buy companies that have gone up in price is what I have found most challenging. Often the company that is consistently growing earnings and is 5 times the price it was 10 years ago is better buying than the company that has fallen to half the price it was 10 years ago and has contracting earnings. Now I am trying to stick to companies that have a long listing history and have a strong history of earnings growth. UOS seems to fit these characteristics and would fit into the 50-300 based on its EV.

* No doubt this is temporary