David slaying Goliath. The Greeks defeating the Persians.
Harry Truman's victory over Thomas Dewey. History is full of
stories in which the underdog comes out on top.
But such triumphs aren't just the stuff of tall tales. In
fact, a recent
New Yorkerarticle by renowned author Malcolm
Gladwell concludes that these upsets are much more common
than we realize.
As with stocks
The characteristics that, according to Gladwell, help
an underdog defeat a "stronger" opponent are identical to
those that lead
certain stocks to outpace others:
Gladwell cites scholar Ivan Arreguin-Toft, who calculates
that when underdogs possess these qualities, the probability
of their emerging victorious skyrockets from just 28.5% to
63.6%.
In effect, the situation completely reverses, and
the underdogbecomes the odds-on favorite.
These same characteristics also help make winners of
small-cap stocks -- which most Wall Street analysts and
institutional investors routinely overlook simply because of
their small stature.
By way of an example
Let's look at one company that fully embodied those
three characteristics when it had its IPO a mere seven years
ago:
That last clue probably gave it away, but in case you
didn't catch it, the company in question was
Netflix .
Although its IPO went for $241 million in 2002, this David
is now slaying the Goliath that was
Blockbuster (NYSE: BBI), and it now enjoys a
market cap of more than $2.7 billion. And this is just one
instance in which the agility that comes with being small has
helped a tiny company overtake larger competitors.
Size as strength
So companies that embrace their petite size really have
a tremendous, yet often ignored, advantage over their
competition.
But how does this apply to our investing? After all,
investors like you and me care most about
how much money we could makefrom an investment. We want
stocks that can easily double or triple our money -- or
more.
And, again, small-cap stocks have the obvious advantage.
Think about what it takes for a business to grow 10 times in
value:
Company
Current Market Cap
Market Cap After Tenfold Increase
Future Market Cap Roughly Comparable Today
To ...
Microsoft
$230 billion
$2.3 trillion
Purchasing power parity (PPP) GDP of Russia.
Johnson & Johnson (NYSE: JNJ)
$168 billion
$1.6 trillion
PPP GDP of Mexico.
Google (Nasdaq: GOOG)
$158 billion
$1.5 trillion Continued... |