'Big fish in small pond' strategy can do wonders for your portfolio

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We are often in awe of companies that have made it big; the ones that consistently grow revenues and profits and beat everyone to become the biggest. While that is one approach to being successful, today, I argue that that is not the only one. Instead of starting out as a small fish in a large pond, starting out as a big fish in a small pond may not be so bad — not so bad for art, not bad for investing, and certainly not unsuitable for life. Now, here’s a bit of French art history before we get to companies.

During the 1900s, art played an enormous role in the cultural life of France. A ministry regulated the art of painting, which was then considered a profession, like medicine is today. An artist got educated at the École Nationale Supérieure des Beaux-Arts in Paris. Excellent students won medals and the bad ones got weeded out. Eventually, artists would submit their finest canvases to a jury of experts to be showcased at the largest exhibition in Europe — The Salon. Over a million people would visit it, and getting a work exhibited here was considered the supreme stamp of approval for an artist. So much so that an artist called Jules Holtzapffel shot himself in the head in 1866 when he was rejected by The Salon.

The Salon’s attitude, however, was traditional. “Works were expected to be microscopically accurate, properly finished and formally framed with proper perspective and familiar artistic conventions,” says art historian Sue Roe.

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To a few, this was absurd. Édouard Manet, Edgar Degas, Paul Cézanne, Auguste Renoir and Camille Pissarro (now known as the Impressionists) had an entirely different take on what constituted art, writes Malcolm Gladwell in David and Goliath. They painted everyday life, their brushstrokes were visible, and figures indistinct. To The Salon jury, their work was amateurish. Conforming to its standard would require the painters to create art that had no meaning for them, and without The Salon, their careers were doomed.

Eventually, they decided to stop pandering to The Salon and launched their own collective. It had no competition, no juries, and no medals. Every artist was an equal. Their exhibition opened in April 1874 and only slowly started bringing them critical acclaim. Nevertheless, today, the Impressionists have a huge following and their collective work is valued at over $1 billion.

A few companies follow a similar route — choose to chart their own route instead of catering to the accepted norm. While all of us might relate to Apple, let me share the story of an Indian company.

Until 2006,

Eicher Motors

was a struggling business with a market cap lower than $100 million. It was a conglomerate selling trucks, buses, tractors, footwear, garments, and a few other products, but it hardly made any money. Although conglomerates were in favour at that time, Eicher realised it needed focus. It sold off all but the motorcycles and trucks businesses.

Sales, however, continued to be a challenge because of glaring problems. The company’s technology was outdated, and the bikes often broke down. In 2005, 6.5 million Indian two-wheelers were sold in a year, generating $250 million in annual profits. Eicher could have competed in the mass market, but instead chose to create its niche. It launched the Classic 350 in 2009 (a 350cc bike when the majority of units sold were closer to 100cc), which changed its fortunes. By 2019, while its market share of units sold rose to 3.7 per cent (from 0.5 per cent in 2006), its share of profitability rose to 20 per cent (from 3 per cent in 2006).

Choosing to become a larger fish in a smaller pond (higher cc bikes) helped Eicher dramatically. Over the past 15 years, its market capitalisation has risen 84 times to over $9 billion (from $100 million in 2006). In comparison, the two-wheeler industry’s market capitalisation rose just four times.

Eicher could have competed with the large fish (Hero and Bajaj) in a large pond (100cc market), but chose to carve its own niche and decided to become a big fish in a small pond (300cc segment). That has paid off for Eicher. Despite a volume market share of just under 4 per cent, its profit market share is 20 per cent. And the markets have rewarded it handsomely for that (27 per cent of industry market cap).

While there are equally compelling stories of companies that have become category and revenue leaders through grit and foresight, sometimes, the most rewarding stories come from companies that chose to become the bigger fish in the smaller pond. Identifying a few of them early enough can do wonders for one’s portfolio.

(The author, Jigar Mistry is co-founder of Buoyant Capital. Views are his own.)

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