We’re a small private investment manager of the traditional variety. By saying we’re Traditional I mean that we don’t use shift the responsibility of investment management to mutual funds or other third party investment management firms, which add on extra layers of fees. By Traditional we mean that we actually do our own security analysis and portfolio trading and allocation with Charles Schwab as our primary custodian of client assets, we don’t take custody of assets. This was how most investment managers practiced when I first broke into the business in 1982 but with the emergence of Financial Planning and Mutual Funds the layers of fees and responsibilities created greater distance from the manager to the portfolio.
We have a deliberate bias for looking at small cap and micro cap investments for three primary reasons:
1. Small companies are more likely to be mispriced or undervalued relative to large cap peers. For example, Apple has at present 34 brokerage firm analysts following the company. Every bit of data produced by the firm is analyzed, frequently to the extreme. Its extremely difficult to maintain an edge under that type of scrutiny. However for the Small Cap companies we follow and invest in its not uncommon to have zero to 1 analyst following the firm. By following companies well below the analyst radar screens the scarcity of information can create opportunities we hope to exploit for our clients.
This is hardly a knock against investing in Large Cap companies as it is our desire to have some sort of advantage when investing. While Apple may continue to provide significant gains for its shareholders, the stock does sell at 29 times current earnings and the opportunity to have a competitive advantage over our peers is minimized by valuation and intense coverage.
2. The advantage of being small: Being that RMHI is a small investment management firm I deliberately decided to use our small size to our advantage. As investment firms get larger over time they’re forced to move up the scale with investments they consider. A firm that focused on Small Caps during their early years is forced to consider Mid to Large Caps as their assets expand over time.
Simply put, we can consider investment stakes in companies that larger firms cannot consider. This is especially important for the Socially Responsible Investor since many terrific Green Technology companies are $50 million to $200 million in capitalization, too small for most managers. Secondly, our small size allows us to still invest in Healthcare through benign service providers without resorting to Healtcare investments within the S&P 500 Index.
Our identification of RINO Intl. (RINO) before it even gained admission to NASDAQ while it was selling at just 4x 2009 earnings is a classic example. At the time of our spotting the stock at $4 a share the capitalization was just approximately $100 million and thus too small for most managers or even many mutual funds to consider.