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Daily Speculations The Web Site of Victor Niederhoffer & Laurel Kenner Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter; a forum for us to use our meager abilities to make the world of specinvestments a better place. |
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Q:
Are small caps better than large caps?
Chair's response:
There is more to the small-cap/large-cap differential than meets the eye. For 20 years after the outperformance of small caps was noted and numerous funds were set up to capture this "inevitable regularity," large caps performed significantly better and all the small-cap funds lost money. The Triumphal Trio called attention to this reversal of fortune in a 1999 article called "Murphy's Law and Market Anomalies." Naturally, 1999 was the year that things turned around again, and once more, small-caps began to outperform.
All this was guaranteed to happen by the Baconian theory. And of course none of the studies of small-cap stocks had any meaning in the first place because they all suffered from survival bias, and unobtrusive studies are the only ones that matter or should even be considered in such cases.
And when you buy a stock with a market value of $500,000 and its prices goes from 1/2 to 200, and this accounts for the only reason that the statistical studies show small caps were better, why you wish to curse the mistress* even more than usual.
*the perverse, the relentless, the ever-alluring Mistress of Markets