This probably explains why my approach has never quite evolved into holding a handful of large positions. I realise that limits the potential upside, but so be it.
Since the GFC the normal tailwind of growth hasn't really been there (outside the US at least) and waters can seemingly be becalmed for long periods, even without disruption. I'm not sure management teams (and investors) had fully adjusted to that. The lack of capital available since 2021 really amplifies that.
It may be a bit of a cop out, but having a modest monitoring position with the potential to scale if the thesis appears to be playing out (with a bit of momentum rather than just a few green shoots) helps limit the downside even if it may not be optimal (although the UK small cap market is so moribund currently that it seems to take quite a lot to move a share price up in a sustained way - prospects in 18 months' time seem to be easily shrugged off).
On your point about diversification. I don't think it's a cop out at all - there's lots of smart small cap investor's who've successfully employed the approach your describe (i.e. small position and scale when the thesis starts to play out).
The longer I've been doing this, the more I too recognise the benefit of holding (and more deeply learning about) a company/management before making it a large position. Especially, if it's pretty illiquid.
Sorry, I didn't really understand your comments about what management teams (and investors) hadn't fully adjusted to. Perhaps you could explain this a bit further?
The 'tailwind' point is that with growth slowing (in the UK and Europe) from circa 3% before the GFC to maybe 1% and the level of disruption increasing, management teams seem to overestimate what they can achieve, particularly with new entities like AssetCo and S4.
Turnaround situations also seem to be much harder to get traction on the top line and so rather than benefitting from operational gearing it is the opposite with cost cutting just aiming to survive.
And since 2021, for any new equity investors seem to require a very high hurdle. This can create a standoff with existing holders who don't want to be diluted significantly.
Adrian, this is a really useful piece. Thank you.
This probably explains why my approach has never quite evolved into holding a handful of large positions. I realise that limits the potential upside, but so be it.
Since the GFC the normal tailwind of growth hasn't really been there (outside the US at least) and waters can seemingly be becalmed for long periods, even without disruption. I'm not sure management teams (and investors) had fully adjusted to that. The lack of capital available since 2021 really amplifies that.
It may be a bit of a cop out, but having a modest monitoring position with the potential to scale if the thesis appears to be playing out (with a bit of momentum rather than just a few green shoots) helps limit the downside even if it may not be optimal (although the UK small cap market is so moribund currently that it seems to take quite a lot to move a share price up in a sustained way - prospects in 18 months' time seem to be easily shrugged off).
Great comment, thanks DB.
On your point about diversification. I don't think it's a cop out at all - there's lots of smart small cap investor's who've successfully employed the approach your describe (i.e. small position and scale when the thesis starts to play out).
The longer I've been doing this, the more I too recognise the benefit of holding (and more deeply learning about) a company/management before making it a large position. Especially, if it's pretty illiquid.
Sorry, I didn't really understand your comments about what management teams (and investors) hadn't fully adjusted to. Perhaps you could explain this a bit further?
Thanks Adrian.
The 'tailwind' point is that with growth slowing (in the UK and Europe) from circa 3% before the GFC to maybe 1% and the level of disruption increasing, management teams seem to overestimate what they can achieve, particularly with new entities like AssetCo and S4.
Turnaround situations also seem to be much harder to get traction on the top line and so rather than benefitting from operational gearing it is the opposite with cost cutting just aiming to survive.
And since 2021, for any new equity investors seem to require a very high hurdle. This can create a standoff with existing holders who don't want to be diluted significantly.
Got it! Thanks for explaining. That's an excellent point and similar to what I'm seeing too.
Great write up Adrian - lots of food for thought in there well done and you aren’t alone!
Thanks Simon :)