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We believe in the potential of micro- and small-cap stocks. With about 6,000 stocks in the US alone, these segments offer higher average returns than large caps. Our data shows an average return of 12.8% versus 10.7% for large caps (source: Duff&Phelps). Furthermore, many 100-baggers have their origins in micro- or small-cap stocks, before their significant growth.
Owner-Operators have skin in the game. They are the ones who have invested their money and, more importantly, their reputations and dreams in the companies. They are in it for the long term and have a proven trackrecord of building outstanding businesses.
Skin in the game means you have taken risk (in this case financial and reputational risk) by being involved in the achievement of a goal. The term “skin” refers to an investment, and “game” is a metaphor for the investment process. We have skin in the game because we invest a significant portion of our net worth in the Fund. The CEOs of the companies we invest in have skin in the game.
Historical data shows that value stocks outperform growth stocks over the long term. They offer a margin of safety and have the potential to generate a respectable return over with less downside risk. To enhance returns, we will allocate a modest portion of our portfolio to growth stocks, around 20%. This approach allows us to capture upside potential while managing downside risk.
Financal markets crash from time to time. Based on historical data, there have been 1 to 2 declines of more than 20% over a five-year period. For psychological comfort and to have cash available to buy undervalued stocks after a significant market correction, we implement a strategy to (partially) hedge the portfolio against major stock market crashes. We use put options to manage these risks.
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