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3 Reasons Investors Can Be 'Pleasantly Surprised' With Small-Cap Stocks

3 Reasons Investors Can Be 'Pleasantly Surprised' With Small-Cap Stocks

Men's Journal always has an interesting interview at the end of every issue. Readers can often times find sound advice for investing in it.

The interview with James Lee Burke, the Southern noir master, was no different. He was asked what kept him going after repeated rejections for a novel. Mr. Burke responded, "Years ago a Franciscan theologian told me, "Don't keep score. Just bear down on the batter, one pitch at a time, and toward the top of the ninth, you'll be pleasantly surprised at the arithmetic on the scoreboard."

Here are three reasons it is easier to "bear down" when owning small-cap stocks.

The business model is easier to understand.

Warren Buffett, the legendary investor who is worth over $50 billion, stated in an interview in Fortune that he learned more from owning See's Candies, a $25 million buy, than from his investment in large companies like Coca-Cola or ExxonMobil. The reason: "It's one thing to own stock in a Coca-Cola or something, but when you're actually in the business of making determinations about opening stores and pricing decisions, you learn from it. We have made a lot more money out of See's than shows from the earnings of See's, just by the fact that it's educated me."

Related: 3 Reasons To Be Bullish About Luxury Brand Stocks

It is easier to tell if it is a great business.

In the spring of 2008, Goldman Sachs (NYSE: GS), Citigroup, and a lot of other Wall Street firms sure looked great. Now around $170, Goldman Sachs was over $200 a share in May 2008. About a year later, the American taxpayer had to save Wall Street and some $10 trillion later, that help is ongoing. But great small companies like See's Candies and Metropolitan Movers have never needed bailouts. While Wall Street firms rattled the tin cup, Metropolitan Movers won awards.

Small businesses can carve out lucrative niches in areas where giants such as Coca-Cola operate.

In an article on Benzinga, "5 Smaller Beverage Companies Gunning for the Big Boys," the author detailed how small-cap beverage firms like High Performance Beverages have, "caught the giants sleeping by developing newer offerings, such as the now ubiquitous energy drink. The smaller companies experiment with new tastes and formulations that the giants are too afraid to try."

Success in a profitable area is much easier to notice in a See's Candies, Metropolitan Movers or High Performance Beverage than it is in a Coca-Cola, ExxonMobil or Citigroup. From there, it is easier to "bear down" on when, where, and how to invest. As Warren Buffett has demonstrated, investors will be more than "pleasantly surprised" with the results!


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