The Next Big Thing

While investors in small publicly traded companies, initial public offerings and in private businesses may adopt very different strategies and have different views of the markets, they do share some common beliefs.

q Firms that are lightly or not followed by institutions and analysts are most likely to be misvalued: As firms become larger, they attract institutional investors and analysts. While these investors and analysts are not infallible, they are also adept at digging up information about the firms they follow and invest in, making it less likely that these firms will be dramatically misvalued. By focusing your attention on firms where there are no public investors (private firms and initial public offerings) or on firms where there are relatively few large investors, you hope to increase the payoff to good research. Stated in terms of market efficiency, you believe that you are more likely to find pockets of inefficiency in these parts of the market.

q Good independent research can help you separate the winners from the losers: Even if you buy into the notion that stocks that are lightly followed are more likely to be misvalued, you need to be able to separate the stocks that are under valued from those that are over valued. By collecting information on and researching lightly followed firms – private companies for private equity investments, firms just before initial public offerings and lightly followed publicly traded firms – you can gain advantages over other investors and increase your exposure to the upside while limiting downside risk.

In other words, these strategies all share the belief that the best bargains are most likely to be found off the beaten track.