What 'Prince of Penzance' can teach investors

They're often the most dependable, and generally offer compelling fully franked dividends, but they're not always the best way to grow your wealth.

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They call it 'The Race that Stops the Nation'.

The Melbourne Cup certainly lived up to its hype yesterday.

Michelle Payne became the first female jockey to win the Melbourne Cup, riding Prince of Penzance to a historic win.

In fact, Prince of Penzance was also the first 100-1 winner since World War II. It was the equal-fourth biggest outsider to win Australia's most famous horse race.

I'll admit, I'm not much of a punter. In fact, every year I ask myself why I even bother – I know I'm most likely going to lose my entire stake (typically $10 to $20, mind you).

But what I do know about betting is that the odds can become seriously distorted – the chances of a horse winning are rarely what they seem.

For instance, the horse that is the 'favourite' often attracts the attention of 'mug punters', thus reducing the price they'll pay if they cross the line first.

But does it improve the probability of them winning? Apparently not…

The Japanese Fame Game was the favourite leading into yesterday's horse race. It ended in 13th place, just ahead of The United States and a number of other horses offering small odds leading into the event.

Where investors make their money

Just like the favourites in yesterday's horse race, investors tend to pile their money into the country's biggest corporations.

I'm talking about the Commonwealth Bank of Australia (ASX: CBA) and its big bank brethren.

Telstra Corporation Ltd (ASX: TLS) and BHP Billiton Limited (ASX: BHP) also attract big money, as do the supermarket giants.

But, to borrow a line from The Sydney Morning Herald:

"The best punters make their money by exploiting the gap between the odds and the probability."

Those blue chip companies highlighted above are the ones that attract the majority of the financial media's attention.

They're also widely followed by analysts and held in most investors' personal portfolios.

All of these factors make it very difficult to gain an edge when buying their shares – just like when taking a punt on the horse that is a favourite to win.

In fact, you might be interested to note that not one of the Big Four banks (nor the miners, for that matter) has found its way onto the Motley Fool Share Advisor scorecard to date.

Sure, each of them are great businesses. I don't expect any of them to disappear anytime soon while they also offer compelling, fully franked dividend yields.

But at their current prices, the 'gap between the odds and the probability' certainly don't appear favourable, in my opinion at least.

Sometimes, it's necessary to fold back the covers and take a look at some of the market's less appreciated companies. That is, those which aren't typically household names whose capabilities mightn't be fully understood by other investors just yet.

Take Corporate Travel Management (ASX: CTD) as a great example.

Scott Phillips, who leads Motley Fool Share Advisor, first recommended members buy this underappreciated company in August 2012.

At the time, Corporate Travel Management was barely on the radar of most investors, as was the case with Prince of Penzance in the build-up to yesterday's race.

Since then however, it's galloped from strength to strength, growing earnings and dividends at a very impressive clip.

In fact, members who followed Scott's advice at the time would be sitting on an incredible return of more than 410 per cent.

That compares to a mere 39.3 per cent return from the All Ordinaries (ASX: XAO).

Foolish Takeaway

Just as mug punters (no offence) can tend to focus on the favourite horse, some investors can rely too heavily on blue chip shares.

They're often the most dependable, and generally offer compelling fully franked dividends, but they're not always the best way to grow your wealth.

As important as it can be to maintain exposure to some of these companies, investors should also consider exposing themselves to companies with greater growth prospects and those which haven't necessarily been recognised by other investors just yet.

You'll find plenty of those on the Motley Fool Share Advisor scorecard – and maybe even the next Prince of Penzance.

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