Small Cap Stocks Outperform Large Cap Over Long Periods of Time
Key Investment Principle #2
Small Cap stocks are stocks of companies whose market capitalization is typically less than $2 billion. Large Cap stocks usually have market capitalization higher than $2 billion. Market capitalization is the sum of all outstanding shares multiplied by the current share price.
- Small cap companies do not have the law of large numbers working against them regarding percentage gains in earnings, sales, and book value.
- Small cap companies can grow faster by both increased market share and overall market growth.
- Small cap companies usually have more transparent accounting because it is harder to hide fraud in a small company.
- Real world data as well as academic research confirm the outperformance of small cap stocks in U.S. markets. So far recent research confirms similar results in international markets.
Click to view: Average Returns (%) 1927-2005
Click to view: Average Annualized Returns (%) for 10 years ended Feb 14, 2007
| Period | Total Cumulative Small Cap Outperformance | Annualized Average Small Cap Outperformance | Length of Cycle (years) |
|---|---|---|---|
| 1931-1945 | 401.20% | 12.20% | 14 |
| 1957-1968 | 191.60% | 10.20% | 11 |
| 1974-1983 | 308% | 16.90% | 9 |
| 1997- ? | 62.90% | 5% | ? |
Source: MSCIBARRA, Standard and Poor’s Index Services Group, Center for Research in Securities, Fama/French Study on Cross Section of Stock Returns 1992, Moody, Aldrich & Sullivan study on Small Cap Value 2002. Performance does not reflect expenses associated with management of an actual portfolio.