Gervais Williams is an award winning fund manager and the author of a best-selling book all about penny shares, called The Future is Small: Why AIM Will Be The World?s Best Market Beyond The Credit Boom.
He?s a highly respected authority on investing here in the UK and a lot of very rich people take what he says very seriously.
So, I was interested to see him say this in an interview recently (the emphasis is mine):
??what we saw in the 70s and 60s, very difficult times in the UK. A period with regular recessions, devaluations were regular and we had some unsettled periods with interest rates going up very substantially, small companies outperformed. Small quoted companies outperformed again and again, for three entire decades. We think that?s about to start again.?
He was being asked about whether it was a good idea to be investing in small companies in the current economic climate.
Obviously, as the author of a book entirely dedicated to the idea that penny shares could be the best type of investment for our times, Williams is going to be bullish about investing in small companies?
But he?s not alone.
This idea that small companies can still do well during bad times is a common belief held by many of the experts I?ve personally interviewed on the subject.
For example, when I visited Westminster to discuss investing in small companies with the Financial Times columnist and renowned small company investor, Lord John Lee, he explained that small companies are often in a stronger position during bad times (the emphasis added is mine):
??the smaller company, even if there?s a downturn in the economy, or the world economy, would still prosper? because [it] only requires a percentage of the overall market. If, on the other hand, you know, you?re a Unilever, for the sake of argument? clearly, if there is a world slump then it?s going to affect your business. And with the best will in the world you can?t do much about it. But if you?re a fairly small player, and you are growing, you can still operate within that overall situation.?
Lord Lee raises a good point here ? the fact that because small companies are operating on a much smaller level and require less customers to exist in the first place, they?re less likely to be hit by an economic downturn when people stop spending. Providing they run a good business, their core customers will still be there.
There?s a general misconception that when it comes to investing in bad times, all companies suffer. That?s simply not the case. For example, discount brands will do well, as will what are known as ?sin? companies, those who produce things like tobacco and alcohol.
And it might surprise you that computing giant Microsoft started during a recession back in the mid-70s? US postal company Fed-Ex began operations around the same time? and the successful cosmetics company Revlon actually started trading during the Great Depression of the 1930s.
Of course, big luxury brands might suffer during bad times, as people are bound to change their spending habits. And sure, in such times, I wouldn?t recommend investing in a small company that relies on a small range of luxury goods.
That?s common sense.
But the fact remains: good companies are able to survive and even grow during troubled times.
Chris Mayer, a successful penny share investor and author of three best-selling books on investment, has been investigating companies since the 60s that have grown over 100 times. When I interviewed him and asked about investing in new companies during bad times, he recounted the story of Coca-Cola (emphasis mine):
??one of my favourite examples is Coke because Coca-Cola went public in 1919 and after its first year it was cut in half. So, it was like $40. In 1920 it traded for like $19. You could have bought Coke, but if you think about what the investor in Coca-Cola had faced at that IPO and you try and put yourself in that person?s place? so, he bought Coke in 1919, he has been cut in half, and let?s say you could give him a little peek ahead at the future. What did he have? Well, you had two wars. You had inflations. You had sugar rations. I mean, there was all kinds of nasty stuff and yet Coke was, you know, a hundred-bagger many times over. So, I do think that you can get too wrapped up in the moment of trying to call the market?s turns where you?d be better off trying to dig through some opportunities that will grow and be successful over, you know, a ten-year-plus period of time.?
It?s interesting to think about a story like that because it reminds us that though we think the events that occur in our own future will somehow change things forever, the fact is, history continues around us?
Looking back at that early investor in Coca-Cola, we would say it was a sure thing that Coca-Cola was a good investment. But if I launched a soft-drinks company today, and told you that we would have a world war next week, recessions and a ration on the main ingredient of my product, most people would think I was mad.
But the clever investor ? and I know you belong in that group ? knows that the future can bring anything. That?s true of life, let alone investing. And when you understand that you can?t control the future, you realise that the key to success lies in considering the things you can control.
So, in terms of small companies, you look to factors you can measure ? the money the company makes, the debts it might have, it?s potential for growth, it?s ownership.
These are things you can consider and build an investment case around, regardless of whether you think we?re in bullish or bearish times. I mean; a company that has huge debts is unlikely to be a good investment whether the overall markets are going up or down.
So, whether we continue down this unprecedented path of low interest rates and easy money or if things start tightening, as they surely must, as an investor in sound small companies, it should have little effect on you.