Welcome to Stocks & Stones
Have you ever wondered why Venture Capital (VC) has been so popular as an asset class compared to small public companies, or "microcaps"?
This question has been looming in my mind for quite some time.
VC investments in the US have increased five-fold over the last ten years. Institutional investors have been allocating more and more dollars to the asset class.
Small public companies? Not so much. The asset class has been underperforming its large-cap peers for over a decade. There's the old saying that "nobody gets fired for buying IBM.". Well, nobody gets fired for buying large caps (or VC funds, for that matter). But buying small public companies can certainly get you fired these days because it's contrarian and hasn't worked out for a long time now.
When you look under the hood, though, aren't VC-backed and small public companies fairly similar? They're both small and growing quickly. They both need capital to grow (for the most part). Assessing management teams plays an overly important role in both cases.
You can make a case that companies stay private longer now and that VCs typically back the best opportunities before they go public several years later. But fundamentally, these are the same types of companies. Why is the private market viewed so highly compared to the public market?
I guess that volatility plays a large part. Investing in VC funds with steady returns and little to no volatility is quite appealing. On the other hand, the public markets, especially on the smaller side, can be extremely volatile and deliver far from steady returns (although returns have been great with a long-term horizon).
Now, here's the catch: volatility is your friend, not your foe. Volatility makes assets mispriced. Volatility opens up the opportunity to add value by acting at the right time. Without volatility, there's no buying low and selling high. Everything is priced closer to its real, intrinsic value. There's no room for the pendulum of emotions to swing to its extremes: fear and greed.
Embrace the volatility and take advantage of it. Look for companies the market has written off, overlooked, or discounted. That's your opportunity to find mispriced assets, those that can generate life-changing returns.
Find them where nobody's looking, where nobody's allocating any capital.
Always remember that markets are cyclical. What's popular and working today will become out of favor one day, and what's currently despised will become the star of the next bull market. Don't skate where the puck is. Skate where it will be in the next five to ten years.
Small public companies are one of the market's most avoided and overlooked corners in 2023. It is literally flush with opportunities.
This fascinating opportunity set is what we'll explore on Stocks & Stones.
Welcome on this journey!