In Adam Smith’s book – The Money Game, he discusses why constant growth cannot continue ad infinitum. Here’s an excerpt from the book:
There is one footnote to this business of looking at past and current success, and it is an arithmetic one. Again, our Senior Sisters may serve as illustration. The point of the footnote is that the more you grow, the harder it is to keep the percentage of growth constant or increasing, because the base gets so big.
A company with $10 million of sales and something unique can double its profits in a year; a company with $1 billion in sales is simply too big to double its profits in a year; it takes time and energy and capital for each incremental increase, and none of these factors is infinite, ever. IBM has 56 million shares outstanding and its market value at this writing is more than $30 billion—thirty billion dollars.
For IBM to double its market value—and hence for your own IBM to double—would take a national and international enthusiasm on the part of both professional and nonprofessional investors alike, because it takes a lot of buying power to move something up $30 billion.
On the other hand, one or two or a handful of professional investors with institutional buying power can move a company which has less than a million shares and a market value of only $15 or $30 million. So I confess to a weakness for smaller companies.
When a company has a million shares outstanding or less, its market is thinner and the stock is more volatile, but this gives me only slight pause. The excitement of volatility is enough to make up for the risks.
A nice safe Turnaround in a big company may offer satisfactory gains, but recognition may be slow and you can get bored meanwhile. Then you must have another Game, or at least something else going on at the same time.
A thin market can be treacherous in selling squalls, so one doesn’t want to be in the thin-market stocks at all in some markets. You do have to know what time of market it is. Markets go in cycles like all the other rhythms of life.
For all the latest news and podcasts, join our free newsletter here.
Don’t forget to check out our FREE Large Cap 1000 – Stock Screener, here at The Acquirer’s Multiple: