If you want to make big returns in stocks, you need to be on an Easter egg hunt…
Editor’s note: Most investors assume that success comes from working harder, analyzing more data, or responding faster than everyone else. But this could be the wrong approach.
In fact, the biggest returns come from searching where others aren’t – the neglected, less crowded areas of the market.
In today’s issue, InvestorPlace Senior Analyst Brian Hunt uses a simple Easter egg hunt analogy to illustrate a powerful truth: The fewer competitors you have, the more likely you are to find great opportunities.
It’s a timely reminder that changing where you “fish” can dramatically improve your results.
Now, I’ll let Brian take it from here…
Picture this…
It’s Easter, and you’re ready for a neighborhood Easter egg hunt.
More than 100 eggs were hidden in a small local park. Each egg has a treat inside it. You’ve been told that one special egg has a cash prize.
If you were on this chase, which of the following two scenarios would you rather be in?
- In addition to you hunting eggs in the park, there are 1,000 other people searching for eggs. It’s a crazy house.
- In addition to you searching for eggs in the park, there are only 10 other people searching for eggs.
If you’re like most sane people, you’ve chosen B.
You’d rather have this:
Who is this:
You’d rather have just 10 people competing with you… rather than 1,000 other people wandering around the park like a swarm of locusts.
What does this have to do with investing?
Well, this same dynamic is at work in the stock market every day.
Financial markets are where millions of people go to choose opportunities in stocks, commodities, currencies, options, bonds and real estate.
In this big market, everyone is looking forward to it He buys Assets for below What they deserve and aspire to He sells Assets for more than What they deserve.
Basically, everyone is trying to outdo everyone else.
Everyone is looking for eggs.
Financial markets price most assets correctly most of the time.
However, it is not a perfect system. Windows of opportunity – where you can buy assets for less than they are worth or sell assets for more than they are worth – appear from time to time.
In the investment world, these windows are called “market inefficiencies.”
These are the opportunities that can make us a lot of money.
However, the more people study, monitor and select the market and its opportunities, the more competition you will have in that market… and the less likely you will be to find inefficiencies in the market.
The more people choose the market, the smaller its pricing inefficiencies are, and the shorter its windows of opportunity.
In financial markets, the biggest competitors are institutional investors.
Institutional investors are the elephants of financial markets. This group includes mutual funds, pension funds, large hedge funds, and insurance funds. It also includes sovereign wealth funds, which manage the savings of entire countries.
One large institutional investor can manage over $10 billion in assets.
So, even a wealthy person with $5 million in assets is a mouse compared to this elephant (in this case, the elephant is 2,000 times larger).
Some institutional investors manage Much more From 10 billion dollars.
Norway’s sovereign wealth fund — which has been inflated by oil revenues for years — was worth more than $1 trillion in 2017.
This is 100 times larger than a large corporation that has $10 billion to invest.
The world’s largest institutional investors have ridiculously large sums of money to invest in stocks, bonds and other assets.
These are typically used by large institutional investors Armies From analysts who spend hundreds of thousands of hours each year searching the world for opportunities.
These analysts do a lot of old-fashioned “financial detective” work by visiting public companies and interviewing industry experts.
They also use the world’s most advanced computer algorithms and “big data” analytical software to comb through market data.
These programs run 24 hours a day, seven days a week… sifting through all the world’s financial data in thousands of different ways at dizzying speed… searching for pricing inefficiencies, small and large.
Picture that egg hunting at Easter again… And realize that the stock market is a highly competitive hunt for Easter eggs.
This is the bad news.
The good news is that the financial market is a large and diverse place.
There are Easter egg hunts that adults cannot participate in.
Size problem
In the world of investing, professional investors are obsessed with “liquidity.”
When it comes to buying and selling investments, liquidity is a measure of how easy or difficult it is to transact in securities.
For example, take Amazon stock. Since Amazon is one of the largest companies in the world (worth over $2 trillion as of 2026), and since many people like to buy and sell its stock, we can say that Amazon stock is “very liquid” or “highly liquid.”
There is a large market for Amazon stock with buyers and sellers making many sales every day. In 2022, it was common to see more than 70 million shares of Amazon stock traded in a single day.
On the other end of the spectrum, let’s take a small, little-known company with a market capitalization of just $50 million (less than one-tenth of one percent of Amazon).
Since this company is small by stock market standards, and since most people have never heard of it, the company’s shares will not have a lot of liquidity.
Remember, market capitalization is simply the number of shares outstanding multiplied by the stock price. This means that with penny stocks, there simply aren’t all that many shares on the market (compared to, say, Amazon, which we just talked about). This makes it difficult for someone to buy a large amount of that stock – there may not be all that many sellers.
Now here’s where it gets interesting…
Let’s say you manage a $10 billion stock portfolio.
For a stock position to have a meaningful positive impact on your fund’s results, it must represent at least 3% of your fund’s assets.
Most good managers like to put 4% to 8% of their money into a stock idea that they think is really great.
If you’re looking to allocate 3% of $10 billion to implementing a great idea, that means you’re looking at an investment of $300 million.
This amount is six times more than a small capital of $50 million.
Even if you wanted to put just 1% of your money into a stock, that’s $100 million.
You get the idea.
Big money managers can’t join the Easter egg hunt for small stocks.
They also cannot “play” in other small markets with limited liquidity, such as many options markets, smaller investment funds (such as closed-end funds and ETFs), individual bonds, small-cap foreign stocks, and small-cap foreign stocks. Penny stocks.
When you “play” in small markets with modest liquidity, you cannot beat the richest and most powerful institutions in the world armed with armies of the best analysts and the best computers in the world.
Instead of competing against thousands of other Easter egg hunters, you’re competing against modest numbers of them.
Think of it like you are buying a house. You want to be a buyer in an area with few other buyers… rather than a buyer in a town where lines line up down the block after homes go up for sale. When you’re a buyer, you don’t want a lot of competition.
I can’t resist coming up with another analogy to convince you:
Think of it like fishing. You don’t want to hunt in the same place as 1,000 other hunters. You prefer to have a quiet stream and its fish all to yourself.
Successful investing and trading is about tilting the odds in your favor.
The more you get this advantage, the more successful you will be.
Looking into smaller, less liquid markets – such as the small cap market – is one of the best ways to do this.
It is considered,
Brian Hunt
InvestorPlace Senior Market Analyst
note: Eric Fry, here. Investing in small markets is an excellent way to protect yourself amid today’s unpredictability… but knowing exactly which stocks to buy, which stocks to sell, and when, can still be a challenge.
That’s why I encourage you to watch My free podcast “Sell This, Buy That”.where I explain my approach that has led to gains in several sectors, including 60% and 30% in select biopharma and energy companies.
Plus, I’m sharing the names of four companies to sell before they collapse, and four more that could double your money in the coming months.
