Why trying to time small caps is a "big waste of time" (and 2 long-term stock ideas)

Much has been made of the “Great Rotation” of late and the move away from highly concentrated large caps into small-cap equities, particularly in the US.

Greg Dean, founder of Langdon Equity Partners, is having none of it. When quizzed about whether the rotation was impacting how Dean and his team invest, the short answer was ‘no’.

Late last year, amid widespread commentary about 2024 being the ‘year for small caps’, Langdon wrote about the time and energy people spend talking about timing in small caps and called it a “big waste of time”. Dean feels a similar way about the rotation.

“The reality is if you wait for the perfect time, you've probably missed out on a lot of opportunity during that period when fewer people were interested”, says Dean.

Dean founded Langdon in 2021 on the concept of a “clean sheet of paper” – i.e. not being beholden to anyone but investors.

His philosophy is built on deep research and holding management to account, allowing him to ‘trust but verify’. He adds that speaking with management is a delicate balance that is often “executed poorly”.

“You think you have to be aggressive and definitive or you have to be a “yes” person and agree with everything that they're telling you, and neither of those is optimal”, says Dean. 

Why small caps?

An inquisitive nature, coupled with not wanting to follow the herd, pushed Dean towards small caps around 10 years into his career when he felt that was where the excitement was, rather than merely ticking boxes.

“I realised this is where I was having the fun, but also this is what was driving returns, talking to these companies where I could see every key decision maker in an afternoon.

“I could travel to see every facility or every operating unit within a week or a month. I enjoyed doing that fieldwork much more than sitting in their headquarters and having a coffee and staring at the carpet and the boardroom table.

“That is not where the business is done”, says Dean.

Uncommon approach

If it wasn’t already clear, Dean is not interested in being like everyone else.

One of the core tenets of his philosophy is “if you want uncommon results, you have to do uncommon things”.

Dean points out that while people remember that when it comes to losing weight or learning a new language, “then they apply common approaches and desire uncommon returns in investing”.

“We meet companies that are less well known, by definition of them being smaller and less understood”.

In popular phraseology (no, Einstein never said it), the definition of insanity is doing the same thing repeatedly and expecting different results.

In investing, a suitable parallel according to Dean would be buying the same 35-50 stocks as everyone else and expecting that you will outperform. Nonsense.

The other core of the philosophy is that the companies Langdon meets with are typically run by “uncommonly talented people with uncommonly successful track records.”

According to Dean, the final piece of the puzzle is patience and waiting “for [the company] to have some sort of short-term hiccup or headwind so that we can buy them with a margin of safety.”

Dean adds that this last part is important; “You have to be really vigilant on what are you paying for, and so going out and trying to find less obvious compounders is the best way to distil what we're doing at Langdon”, says Dean.

Listen to the podcast

In the following episode of The Rules of Investing, Dean delves deeper into small-cap investing, explains why he and his team take more than 300 individual company meetings each year, talks through the current portfolio tilt, and shares why the fund favours Europe over the US.

He also upacks two global small-cap stock ideas that highlight Langdon’s approach.  

Other ways to listen

• Podbean
• Spotify

Timecodes

0:00 - Intro
1:36 - Investment background and founding Langdon
5:05 - Biggest influences over the journey and why small caps?
8:39 - Investment philosophy origin story
11:01 - When is enough, enough?
12:45 - The Great Rotation and current market conditions
15:31 - Company meetings how the best stand out
20:09 - Honing the craft
23:42 - Current portfolio: underweight US, overweight Europe
26:58 - Why cashflow is Landon's North Star
28:07 - Other non-negotiables
29:12 - Testing beliefs
30:40 - Navigating patience as a small-cap investor
32:57 - Small-cap stock ideas
37:52 - What are investors getting wrong about today's markets?
49:27 - Courage of conviction
41:29 - The five-year stock

Owners of world class smaller companies

Greg and the team at Langdon Partners seek to invest in high-quality cash generative smaller companies run by talented and long-term oriented teams that are fundamentally undervalued. To learn more, visit their website or Fund Profile below. 

Managed Fund

Langdon Global Smaller Companies Fund

Global Shares

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