Utilizing and Understanding the Investment Style Box

Those with limited knowledge on an Investment Style Box may not realize just how much information can be conveyed through this seemingly insignificant tic-tac-toe board.

John Ben Brazier

Nov. 14th, 2019

A group of colored boxes
A group of colored boxes
Utilizing and Understanding the Investment Style Box

Even the most novice of investors have likely seen the ever popular “style box”. While self-explanatory to a seasoned veteran of the investment world, those with limited knowledge of the subject may not realize just how much information can be conveyed through this seemingly insignificant tic-tac-toe board.

Market Size

The left side shows market capitalization, or market cap for short. Market cap is calculated by multiplying the price of 1 share of the company’s stock by the number of shares outstanding. This is a very simple way of calculating how large a company is.

Small cap companies are companies that have a market capitalization of $250 million to $2 billion and are generally viewed as having more risk than the other levels.

Mid cap companies are anywhere from $2-$10 billion.

Large cap companies fall between $10 and $100 billion and are traditionally thought to be less risky than small or mid cap.

Market Type

The top shows the “type” of company.

Value companies are companies that trade at a lower price than what they’re fundamentally worth. The idea is that the investor benefits if/when other investors recognize the company’s true value. As it can take some time for a company to “turn around”, these are typically seen as longer-term investments.

Growth companies are companies that typically trade above what they’re fundamentally worth – with high price to earnings ratios – and the intentions to continue to grow faster than similar companies. With prices of growth companies typically being above their relative value, bad news about a company can be incredibly detrimental which is why it is often said that growth companies tend to be considered more volatile.

With that said, blend is a mixture of value and growth characteristics.

Utilization

The style box is a great way to get to know a company at a very broad level, however, it must be noted that investment decisions should never be made just because a portfolio is lacking weight in small cap growth and “X” company fits into that category – proper due diligence is always important.

Hope you find this educational and helps you to organize your financial life.

Have questions on this topic? Contact us.

Mersberger Expertise

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