Size matters in investing as much as in other human
endeavors. Bigger is better for most activities; Goliath usually defeats David.
But financial economists have known for decades that small is the new big:
investing in smaller firms increases investor returns a great deal over
investing in the Blue Chips. Eugene Fama had to add firm size and value
investing, to the Capital Asset Pricing Model to make it work.
Recently the journal of the American Association of
Individual Investors carried an article in its January issue on the subject of
firm size, “Exploiting the Relative Outperformance of Small-Cap Stocks” by John
B. Davenport, Ph.D., and M. Fred Meissner. The conclusions are striking:
• Small caps outperformed large caps 51% of the time between 1926 and 2012, but realized a cumulative excess return of 253%.• Investors have higher probabilities of capturing small-cap excess returns in times of economic expansion immediately following recessionary periods.• Small-cap sectors realize higher returns than large-cap stocks when the large-cap sectors are in favor.
