STREET DOGS

We recognise that most small businesses are destined to stay small given their limited scope for both structural growth and meaningful differentiation. Such businesses constitute the bulk of the “smaller companies’ universe” but are of no appeal to us.

What does intrigue us about that universe is that it contains a subset of immature but potentially high-growth companies. By identifying attractive growth companies earlier, we seek to benefit from growth at an earlier stage in a company’s lifecycle and retain ownership of successful companies as they grow and thrive. We ultimately see our role as investing in what are potentially the larger companies of the future as opposed to the smaller companies of today. — Edinburgh Worldwide Investment Trust

Smaller companies as a group have made far more profitable investments than larger ones. Insist on financial strength. Growth can only be sustained by companies with strong finances. It will be undermined by those that have to guzzle cash to feed their growth. Look for real cash generation, not simply accounting profits. As a rule, avoid turnarounds, start-ups and new issues, which tend to be weakly financed. Insist on fundamental value. A good company is not necessarily a good stock unless it is attractively priced. And sell only reluctantly. – Ralph Wanger

Small companies are much easier to understand. Their financial statements and business models tend to be simple. They probably have a few competitors and a few major customers. It takes almost no time to make the phone calls that analysts rely on to feel comfortable about the business. The marginal value of time spent studying a small company far exceeds that spent on a large one. — Paul Sonkin