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The Flaw in Microcap Millionaires, A Unique Opportunity, and More... - Views on News from Equitymaster

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The Equitymaster Research Digest

The Flaw in Microcap Millionaires, A Unique Opportunity, and More...
Feb 26, 2016

Some of our Microcap Millionaires (MCM) subscribers think the service has a flaw in the way we measure its performance. We're not using the right metric in their view.

MCM seeks to identify undervalued microcaps. So they think its performance should be compared with a small-cap index. But comparing performance with a large-cap index like the Sensex, as we are doing now - is unfair.

Within this line of thinking is an assumption. The assumption that - over the long term, small caps give better returns than large caps. And so anyone can put together a portfolio of small and micro caps and beat a large-cap index. MCM's true test, in their thinking, is not in how well it does vis-a-vis the Sensex but vis-a-vis a small-cap index.

The myth busted

This strikes me as odd. Market values are the basis for both indices. The large-cap index has firms with higher market value. The small-cap index has relatively much lower market value firms. That's it. There is no other criterion to qualify a stock for a place in the index besides its market value. Which begs the question: Is size alone an important determinant of long-term returns?

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