Size matters if you control your junk
As we have discussed on many occasions, we overweight portfolios to small cap stocks so investors can take advantage of the Small Cap Effect made famous by Fama and French in their pioneering research paper1. As long term investors, we also know that the Small Cap Effect does not present itself every year and unfortunately in 2014 it did not after a very good year in 2013 for small companies. When investing in small companies, however, all companies are not equal and we have known for many years that Small Cap Growth stocks tend to be some of the worst performers in the stock market. This is because of the Lottery Effect that many investors hope will result in them buying the next Apple or Facebook while it is still a small company and before others jump in. I recently read an interesting article that discusses these point in greater detail and thought you may be interested in it as well.
Click here to read this article: ‘Small can be beautiful but avoid urge to punt on riskiest stocks’.
1. Fama, Eugene F.; French, Kenneth R. (1992) “The cross-section of expected stock returns” Journal of Finance.