The Smaller, the Better

Tobin Smith

I always love it when some big-cap money manager or strategist comes on "Bulls & Bears" and tells us, "THIS is the year that large caps will outperform the small-cap stocks."

Or when people ask me, "Why do you focus your research team on small and microcap companies and not the mega-cap stocks?"

Well, these guys looking for large-cap stocks have been wrong on this for seven years now, and gee, looking at the last year, they are WRONG again. Our small cap plays are up 14% while the overall market is flat.

The reason they are wrong about smaller-cap companies has nothing to do with their "cap" — it has to do with their size. It is from the small companies that virtually ALL of the groundbreaking innovation and fast-shifting changes in business models and product lines are created in our economy.

This brings us to the Disney/Pixar and Ford news... and the La Brea Tar Pits I grew up visiting in my youth in L.A. It'll take a second to tie these things all together, so hang with me.


Most media portray this merger as a cult-of-personality play with Steve Jobs coming to Disney as a provocateur and change agent.

Wrong. This is a story about what is right and wrong within corporate America these days. It's about where innovation is and isn't, and why. This news is about how large companies, just like large dinosaurs, can run right into the economic tar pits if they are not very, very smart and determined not to.

The Ford and Disney moves this week are REALLY about how destructive it is to your wealth when you invest in companies with extreme levels of denial and dysfunction that get institutionalized into ever larger and larger companies — and how disastrous this psychosis is to stockholders, and ultimately employees and the overall economy.

Ford's news of laying off 25,000 workers and closing plants is NOT about how Ford is getting screwed by union labor. Rather, it's about how Ford has screwed itself by refusing to admit that the days of no-layoff clauses, skilled pay for non-skilled work, and full pay retirement with womb-to-tomb healthcare ended 20 years ago.

Ford's news is also about how organizational dysfunction can overtake a grand old innovator. While these guys whined away at the Grosse Point Country Club about how the government was killing them and state franchise laws gave the upper hand to their dealers, they gazed upon their parking lots full of Fords, Chevys and Chryslers.

During the same period, Jack Welch led a march that tore up heavily unionized General Electric, Caterpillar lived through seven years of United Auto Workers strikes to become a world leader, and Lou Gerstner smashed the insular white-shirt world of IBM to reinvent the business (now 75% service vs. virtually 0% years ago).

Ditto for Pixar and Disney, with the latter being the king of the pathologically dysfunctional organization.


While Disney grew fat and bureaucratic in the '90s with 133,000 employees, Pixar, with just a few hundred employees, ate its predecessor's lunch in their "franchise" — animated full-length feature films.

The key differentiator between two 100% knowledge-based companies — neither of which manufactures a darn thing, and both companies' assets go out the front door each night — is their culture, creativity, risk-taking and innovation.

Pixar has them in spades, and Disney can't spell the words. Neither can Ford.

When you ask me why we have been negative on both companies for so long, my answer has never been that their markets are saturated or that their workforce was not smart enough or dedicated to their success.

My answer is, and continues to be, that their incredible wealth destruction is a direct result of their dinosaur/behemoth size and cultures — both of these companies have done everything possible to kill themselves.

I grew up in Southern California and have known the Walt Disney Co. for 40 years. It was not ALWAYS such a poster child of dysfunction — years ago it was a lean and wonderful place to work, create and compete with ideas.

I'm sure Ford was that way too in its first 30 to 50 years.

But their failure to keep true to their competitive roots, and their gestation of rampant and virulent denial as to the core strategic and cultural cancer that has metastasized throughout their companies, is the No. 1 reason why I prefer to invest in companies that are the mirror opposite in the key areas of strategic competence — CULTURE, CREATIVITY, RISK-TAKING and INNOVATION.

Steve, babe: Take the $3.2 billion and RUN!

Tune in this weekend to our Business Block, Saturday beginning at 10am ET, for more with Tobin Smith and the entire FNC business team.

Tobin Smith is a ChangeWave research editor and regular FNC business contributor.