In Market, Bigger May Not Be Safer
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

In 1902, pugilist Robert Fitzsimmons, before a famous fight he had with a heavier man, Jim Jefferies, said, “The bigger they come, the harder they fall.” That’s also the view of one Los Angeles day trader, Arnold Silver. Referring to the killings he claims to have made by shorting, or betting against, such big name stocks as AMR (the parent of American Airlines), Eastman Kodak, andPriceline.com, Mr. Silver says, “It seems the bigger they are, the harder they fall.”
That’s an especially relevant comment today, given the tendency of many investors to seek as a safety net the stock market’s goliaths in a sloppy, mediocre market – which pretty much sums up the current one. Actually, the last thing you need in such a market is a laggard or an also-ran. That’s also the wrong safety net. But that’s precisely the net many investors are said to be foolishly using by flocking to big-name stocks, versus smaller companies, on the theory the biggies will likely lead the pack on any sustained market rebound once the effects of the two hurricanes, Katrina and Rita, run their course.
The goliaths, not surprisingly, are broadly viewed as the safest companies in an uncertain market environment because, among other things, they possess the most financial muscle and the greatest stock liquidity, and achieve the strongest cash flows and returns on capital. Likewise, they’re far and away the favorite equity plays of the cash rich institutional investors, and overall returns of large capitalization stocks are historically less volatile than the returns of small stocks.
It may sound logical, but big is no guarantee of beauty or safety. Take, for example, the accompanying chart of the “dream team” from mutual fund industry tracker Morningstar that features a pretty impressive group of big companies. It embraces one of the world’s best-known brands, a dominant and fast-growing computer company, the world’s most successful industrial company, a near-monopolistic software titan, and a behemoth of a retailer. All have major competitive advantages over their rivals, as well as strong cash flow and returns on capital.
On the surface, it would seem like a can’t-miss group of investments, but miss they did. If you owned any of these goliaths for the past five years, you wound up losing money, on average nearly 15% per stock.
As it turns out, Wall Street is notorious for falling in love with big names and frequently recommending them on any material weakness. In recent months, for example, brokerage firms have been pushing such well-known beaten-up big names as Merck, Microsoft, Intel, and Eastman Kodak, a bum strategy so far since they’re all selling near their 52-week lows.
Whether the folks pounding the table for such stocks are right remains to be seen, but there’s a decided risk in thinking too big, according to Dow Theory Forecasts, a well-regarded monthly newsletter out of Hammond, Ind.
The figures tell the story, clearly documenting that big is not necessarily beautiful. They show that the small fries clearly have more sizzle. From 1926 to 2004, small-caps stocks generated annualized returns of 12.7%, versus 10.4% returns for the large caps, according to the newsletter. The same trend has also held true in recent years, but with the smaller companies beating out their larger counterparts in a much more dramatic fashion. In this case, from the end of 1999 through September 6 of this year, the average stock in the S&P 500 Index rose 44%. During the same period, the large-cap index fell 17%.
Meanwhile, what about the components of Morningstar’s dream team? Should the stocks be bought or shunned? Five years ago, they sported price-to-earnings multiples ranging from 35.4 to 83.5. Now the range is much lower, 17.8 to 22.1. A Morningstar equities strategist, Paul Larson, takes a positive view of four of them, noting “they are near or below what we believe to be an adequate margin of safety to consider buying today.” The exception is General Electric, which he contends does not yet provide this safety.
The dream team aside, the bottom line here, as the performance figures demonstrate: Don’t get sucked in by big names alone, which could well be a safety net with a big hole in it.