In the most
recent Boyles letter, we included this quote from Charlie Munger, which we
described as a quote that probably best summarizes our investing focus:
Two markets are inefficient: very small ones (which are not much use to Berkshire, with its $120 billion), and ones where crazy people are doing crazy things, especially if they’re selling. From time to time, the big markets have some crazily mispriced securities in them. But there’s no question that in small markets there’s a lot of opportunity to find mispricings.
I also recently came across a quote from Seth Klarman in his
book Margin of Safety which is
similar, and that I think also gives great description of where opportunities are
more likely to present themselves:
The pricing of large-capitalization stocks tends to be more efficient than that of small-capitalization stocks, distressed bonds, and other less-popular investment fare. While hundreds of investment analysts follow IBM, few, if any, cover thousands of small-capitalization stocks and obscure junk bonds. Investors are more likely, therefore, to find inefficiently priced securities outside the Standard and Poor’s 100 than within it. Even among the most highly capitalized issues, however, investors are frequently blinded by groupthink, thereby creating pricing inefficiencies.
In that same letter, we then described some of the big market names that have done well since the crisis as examples of the groupthink mentioned by Klarman above. Combining those larger-cap examples with the micro-cap example we gave in our Q2 2013 letter I think gives a good flavor of the opportunities that investors and funds with a smaller asset base can look to capitalize on.