Page 304 - How to Make Money in Stocks Trilogy

S = Supply and Demand: Big Volume Demand at Key Points 181

italization stocks are less liquid, they can come down as fast as they go up,
sometimes even faster. In other words, with greater opportunity comes sig-
nificant additional risk. But there are definite ways of minimizing your risk,
which will be discussed in Chapters 10 and 11.
The total number of shares outstanding in a company’s capital structure
represents the potential amount of stock available. But market professionals
also look at the “floating supply”—the number of shares that are available
for possible purchase after subtracting stock that is closely held. Companies
in which top management owns a large percentage of the stock (at least 1%
to 3% in a large company, and more in small companies) generally are bet-
ter prospects because the managers have a vested interest in the stock.
There’s another fundamental reason, besides supply and demand, why
companies with a large number of shares outstanding frequently produce
slower results: the companies themselves may be much older and growing
at a slower rate. They are simply too big and sluggish.
In the 1990s, however, bigger-capitalization stocks outperformed small-
cap issues for several years. This was in part related to the size problem
experienced by the mutual fund community. It suddenly found itself awash
in new cash as more and more people bought funds. As a result, larger funds
were forced to buy more bigger-cap stocks. This need to put their new
money to work made it appear that they favored bigger-cap issues. But this
was contrary to the normal supply/demand effect, which favors smaller-cap
stocks with fewer shares available to meet increases in institutional investor
demand.
Big-cap stocks do have some advantages: greater liquidity, generally less
downside volatility, better quality, and in some cases less risk. And the
immense buying power that large funds have these days can make top-notch
big stocks advance nearly as fast as shares of smaller companies.

Pick Entrepreneurial Management Rather than Caretakers
Big companies may seem to have a great deal of power and influence, but
size often begets a lack of imagination and productive efficiency. Large
companies are often run by older and more conservative “caretaker man-
agements” that are less willing to innovate, take risks, and move quickly and
wisely to keep up with rapidly changing times. In most cases, top managers
of large companies don’t own a lot of their company’s stock. This is a serious
deficiency that should be corrected. To the savvy investor, it suggests that
the company’s management and employees don’t have a personal interest in
seeing the company succeed. In some cases, large companies also have mul-
tiple layers of management that separate senior executives from what’s