The Case for High-Quality Small Caps:
- The chart shows that small cap stocks have only been this cheap vs. large cap stocks at the peak of the dot.com bubble
- The chart, from our paper Small Cap vs. Large Cap Stocks, highlighted that today might be a great time to look at Small Cap stocks
- We have written over a dozen papers documenting the Nifty Fifty phenomenon, the hazards of money-losing stocks in index funds, and the risks in the IPO mania
The risks to investors loom large in our opinion. At the same time, our research suggests this may be one of the best times for active managers who favor high-quality firms at reasonable prices. Please see our work on the opportunities in small cap companies, The Low Cost of High Quality.
With over a decade working together our research team has written a barrage of papers about the risks and opportunities in stocks of various market capitalizations. Investors obsessed with growth potential in large cap companies have sent valuations of certain stock prices to untenable levels in our view.
Our research piece on High-Quality Investing in Mid Cap Stocks presents evidence that there are opportunities to buy terrific companies at below average prices. That same research also provided data showing that many firms that lose money or lacked a real business model were trading at record valuations.
We understand investor’s affinity for low cost market index products that seek to replicate the total market. In his book “A Margin of Safety,” legendary investor Seth Klarman noted that index funds tend to become most popular during bull markets. Please see our upcoming publication of what we learned from Mr. Klarman’s legendary book. We believe many of today’s stocks provide a “margin of peril” to use a term from his timeless text.
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