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Small Caps, Small Investors and Big Gains

Nov 7, 2016

In this issue:
» The stocks likely to double in next three years
» US elections' impact on Indian stock markets
» Market roundup
» ...and more!
00:00
Ankit Shah, Research analyst

History shows that smaller stocks often outgun their bigger cousins. And this has important implications for you. It could change the way you structure your portfolio. Here are some solid findings by Jason McIntosh, one of our global editors from Australia.

Have a look at this chart...



The graph shows the performance of US small caps after inflation. It goes back to 1926 and includes thousands of stocks. RiverFront Investment Group estimates the trend averages 8.2% per annum. So how about the large cap stocks? Well, their average return is around 6.4% - nearly 2% lower.

This performance margin makes a huge difference over time. Small caps are currently ahead by a staggering 4.5 times.

Now, 90 years is long span of time. The period since 1926 encompasses the Great Depression, World War II, and a hodgepodge of financial, economic, and geopolitical crises.

If US small cap stocks managed to beat their larger peers over this time frame, it does prove that small caps have better return potential. And as you saw above, even a 2% difference in annual return, when compounded over long time periods can produce a wide divergence in returns.

Jason McIntosh explains why small caps must be part of every retail investor's stock portfolio:

  • You actually have an important edge over the big firms. This is because you have less capital to invest. In turn, this makes it easier to take advantage of small cap opportunities.

    You see, a big fund can have difficulty trading smaller stocks. There simply isn't always enough liquidity. This often results in a reliance on larger companies.

    Ask yourself this: Which stock is more likely to double in the next two-three years - a company in the benchmark index or a rapidly growing small-to-medium size business?

    The answer is obvious. You can see why smaller stocks have historically done well.

We believe that small cap companies have tremendous potential to be big winners even in India.

But the truth is not every small cap makes a good buy.

And that's why only after back breaking research, long hours of analysis and checking important details...we zero in on a stock.

Using this same proven process, we've put together a special report that reveals 3 small cap stocks.

It's one report that you absolutely cannot afford to miss out on. Get the special report now.

03:00 Chart of the Day

The D-day is almost here now. Tomorrow, millions of Americans will go to the polls to decide who wears the mantle of the most important person in the world. The speculations will finally come to rest as the results will be announced the day after.

A lot is riding on the outcome of election results. A victory for Donald Trump could add to global economic uncertainty. But will situation be different if Hillary Clinton wins?

Here is what the legendary investor Jim Rogers has to say:

  • ...I did not vote for Trump, I did not vote for Clinton. I voted a protest vote. The lesser of two evils, is still an evil if you ask me. So I did not vote for either of these Turkeys. If enough people vote protest, eventually we will stop getting Turkeys as candidates.

    If Mr Trump wins, it will lead to bankruptcy and probably war. If Ms Clinton wins, it will be bankruptcy and war will probably take a little longer.

We could not agree more with Mr Roger's views. Bill Bonner mirrors similar sentiments in the following statement the latest issue of Vivek Kaul's Inner Circle (Subscription required) -

  • How does it come to be that a nation of 330 million people - including some of the smartest, most accomplished, most dynamic people on Earth -end up with a choice between a fool and a knave? Is this the best you can do?

Apart from global economy, the final choice of the voters will have implication for stock markets. Last week, the S&P 500 notched longest losing streak in around half a decade with the tightening of the contentious Presidential race. The CBOE volatility index (that measures investors' expectations for stock swings) too cemented longest streak since December 2013.

As suggested in an article in The Hindu Business Line, there has been a high positive correlation of 0.97 times between Sensex and S&P 500 in the short term - a week after the date of Presidential election to be precise.

US Elections: Should You Care?


A win for Hillary Clinton could mean business as usual, at least temporarily. However, if Trump wins, it could trigger an immediate correction. And other emerging markets could mirror the trend as well.

So should you be concerned?

We don't think so. While we would not like to speculate who would win, any short-term correction on account of elections could offer buying opportunity to value investors. Indian investors, we believe, have reasons to be optimistic due to positive policy developments and structural factors that impact India's economic growth.

Here is Jim Roger again, on India:

  • I repeat you again that if you can only visit one country in your life you should visit India. Mr Modi has finally done something significant, it looks as though he is going to reform GST. But India cannot escape what is going to happen to the world. Nobody can.

We agree that India will not remain untouched to what happens in the world. That said, there are businesses that will continue to do well. And that would create shareholder wealth in the long term when invested in at right levels. So focus on the business fundamentals, and use short term corrections due to global events to add such businesses to your portfolio.

We are keeping a close watch and will use any such crash opportunity to recommend great businesses that look good but do not allow action due to valuation concerns. Meanwhile, you take care at your end to stay clear of profit killers, irrespective of how tempting the valuations look.

04:30

The Indian share markets remained firmly entrenched in positive territory during the noon trading session amid strong global indices ahead of tomorrow's presidential elections in the US. All sectoral indices are trading in the green with metal & healthcare stocks witnessing majority of the buying activity.

The BSE Sensex is trading higher by 286 points (up 1%) while the NSE Nifty is trading higher by 89 points (up 1%). The BSE Mid Cap index is trading up by 1.4% while BSE Small Cap index is trading up by 1.7%.

04:55 Today's Investing Mantra

"Stop trying to predict the direction of the stock market, the economy or elections." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Ankit Shah (Research Analyst) and Richa Agarwal (Research Analyst).

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2 Responses to "Small Caps, Small Investors and Big Gains"

Mahant

Nov 12, 2016

Details given are lucrative. Need to think before investing. But couldnt found link of free material??? Its only related to subscription.

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VINAYAKK

Nov 10, 2016

no coments

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