Mega cap or microcap?

I really must put more effort into coming up with catchy titles. Anyway, finance students are taught about the Efficient Market Theory. The perceived efficiency increases based on the market capitalisation of the stock as more analysts, fund managers, journalists etc follow the situation. The reason for investing in small caps is therefore to swim in an inefficient market, finding those companies the market has missed out on. The message by many in the industry is to put the large caps in the too hard basket and go hunt in easier fields.  This all makes sense, and the performance of good small cap fund managers in benign markets can be terrific. 

Case closed? 

After reviewing my notes and trades over the last year or so, I concluded that at least solely focussing on the perceived inefficient parts of the market might be just a little myopic. I should caution though that many stocks, both large and small, have trended exceptionally well this year, so perhaps this isn't the best point in time do an anecdotal survey and there is also the potential for recency bias. However, consider these basic examples: 

• Berkshire Hathaway (BRK) was hiding in plain sight and is up around 37% for the year, thanks in part to a buy-back.  

• Bank of America (BAC), which was trading at a fraction of book value even though the business was being cleaned up. BAC is up ~100% over the last year. 

• Here in Australia has been Telstra (TLS) - the monster dividend payer that nobody loved. Up over 50% over the last few years

Obviously these examples can be seen as cherry picking, however these examples illustrate that deep value can sometimes be found in household names and the share price performance can be eye-popping. There are plenty more examples out there. And there other big benefits to larger cap names such as liquidity and derivative instruments. Ignoring the large end of town can be disastrous. 

Perhaps part of the reason we (I) sometimes walk straight past situations 'hiding in plain sight' in preference for harder ones is the ego's need to uncover something nobody else has. I'm guilty of that. 

I will keep trying to learn the lesson myself. 

Kristian 

Disclosure: own BAC, TLS