The JLG example was good @Goldfish however I really like the CAT example where they are trying to buy a small cap that is growing into a mid-cap and may well eventually become a large cap, and all the extra eyes that this sort of growth attracts along the way (and buyers with it):

3. Crumbs that grow large enough for giants

Third, some crumbs eventually become big enough for giants to notice. It is at this stage that passive buying can turbocharge returns.

Look at Catapult Group (ASX: CAT). In May 2022, the stock typically traded between $100,000 and $200,000 per day. Now, with Catapult firmly included in the S&P/ASX 300, it’s rare for daily volumes to fall below one million shares. With the share price up fivefold, that equates to more than $5 million worth of shares traded daily—and $10 million days are not uncommon. 

Index inclusion hasn’t been the whole story. Catapult’s business has genuinely improved, with revenue growing nearly 20% a year. But being added to the S&P/ASX 300 has poured fuel on the fire, forcing passive funds to buy in and adding liquidity and visibility.

That’s why, when we’re evaluating new investments, we always ask: Could this business eventually attract passive buying? It’s not the only reason to own a stock, but it can dramatically amplify returns once the giants start paying attention.

Passive giants will keep dominating markets. And yes, small-cap indices have lagged their large-cap counterparts in recent years. But that doesn’t mean all small-cap investing is doomed. Some active managers — including us at Forager — have delivered excellent returns by hunting among the crumbs: forced sellers, battered thematic plays, and future index entrants.

As the passive influence continues to grow, those crumbs should keep falling. And for nimble investors, they’re a feast worth pursuing.

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Bear77 disclosure: I'm not holding CAT, having sold out prior to Will Lopes coming onboard as MD and I followed them but not nearly as closely as I should have after Will started making positive moves and focusing on all of the right metrics. There were plenty of positive signs - green flags if you like - but unfortunately I was focused on other companies and I still had a negative mindset about CAT. My main mistake with CAT was not doing the DD and adjusting my previous negative bias as their situation had clearly changed. They always had potential, but lacked sufficiently focused management who knew exactly where their efforts should be directed - and they got that with Will Lopes. It's one that definitely got away from me.