Micro is beautiful but also ugly
Micro caps can both be great wealth creators and wealth destroyers. Be extremely careful
By Dhirendra Kumar | Oct 3, 2018
I don't know when I first heard the term 'micro cap' but it certainly was not in use in the 90s. We just had big, medium and small companies. We used to call them large cap, mid cap and small cap and that was that.
Today, the range is subdivided into at least one more step, which is micro cap. At Glade Guides, for a long time, we have also been using the term 'giant cap' on our website in some contexts. At this point, a reader is entitled to ask how one can decide what the appropriate number of slots is in which to divide all companies listed in the Indian markets. There are companies ranging from Reliance Industries, which is now worth close to Rs 8lakh crore, all the way down to Antariksh Industries, which is the smallest company in our database and has a capitalisation of Rs 2 lakh.
After all, given the love for jargon and complexity that financial types have, what is to stop someone from having mega-large cap, ultra-large cap, large cap, mid cap, small cap, micro cap, nano cap, minuscule cap, pico cap and so on and so forth? Of course people are free to do that and I'm sure one day someone will reach and even cross these limits.
However, at Glade Guides, we hate jargon and complexity. We follow a simple principle, which is of uniformity of characteristics. Years ago, we invented the 'giant-cap' category, because by characteristic, we found that the largest large-cap companies (Reliance Industries and Infosys being typical examples) were quite different from routine large-cap companies like MRF. So there was a logic to creating a new category. Similarly, at other end, we find that a Rs 4,500 crore company like Monsanto is a fairly substantial small cap and is quite different from the tiny Archies, whose market cap is only Rs 87 crore.
They are different kinds of businesses and from your and our point of view, they are very different kind of investment opportunities. They have to be approached differently and studied differently. At this point, there's no logic of further categories like nano cap but one day there might be. However, you can be sure that we will use them only if necessary.
Albert Einstein famously said, 'Everything should be made as simple as possible but not simpler.' Glade Guides's slogan could well be a variant of this idea: 'Everything should be as complex as needed but not more complex.'
One thing that investors must appreciate about smaller companies is that they are on a completely different part of the risk-reward scale. The smaller the company, the more likely it is that you will go wrong in choosing its stock. However, if you turn out to be right, then the gains can be huge. Ask any investor who had invested in Symphony or Relaxo. And for the other sad side of the story, ask anyone who had invested in any one of the thousands of listed companies that have simply disappeared.