In a land far away called “Zootopia”, there exist lions and zebras. While the zebras feast on green pastures, the lions gorge on the former. Since zebras always assume the risk of being attacked by the predator while grazing, they decide to move in herds. This strategy works well for them.
While moving in herds, most of the zebras always want to
be at the centre of the herd because of the “perceived”
safety while those at the edge are more likely to be
attacked by the lion.
But, as a result of
this, the zebras at the centre have very little leftover
grass to eat, while those on the edge enjoy the fresh
grass. Besides, this concept of perceived safety seems
flawed, since when the time comes, the zebras at the
edge are always the fastest to run for their life.
The same holds true for investing.
Large-cap well-discovered companies may offer great perceived safety to their investors, but never offer even a slight chance at making huge sums of wealth for them. There is a large army of analysts tracking their results and updating their excel models to find the true value of these stocks.
With such wide coverage, chances of alpha creation
become bleak and you are highly likely to replicate
market-like returns.
While those small
undiscovered companies which are still treading the
untested waters may look like risky propositions on the
face of it but offer greater chances at higher returns
if bought at the right prices.
Moreover, when such hidden gems start playing out on their investment thesis, they catch the attention of big institutions which can start a positive feedback loop causing prices to shoot higher causing even more players to jump on the boat leading to euphoria around the stock, giving a good opportunity to book profits.
Therefore, in the markets, if your risk appetite allows, being the zebra on the edge is a good investment strategy which can help you outperform the market, but always keeps you on your toes should a lion comes to attack (investment thesis breaks).
We, at WealthDesk, enable you to invest in WealthBaskets, which are the combinations of equities and ETFs that reflect an idea, theme, or strategy built by SEBI registered professionals.
