Micro Caps Outperform All Equity Classes

Ian Cassel Blog Leave a Comment

John Authers of the Financial Times wrote an article yesterday entitled, “Hedehopper’s guide to living with inflation”.  This article gave some interesting long term data as it relates to micro cap stocks over the long term [very long term].

This week saw the publication of two annual monumental studies of long-term securities returns: the Barclays Equity Gilts Study, and the Credit Suisse Global Investment Returns Yearbook. Both go back more than a century and cover many countries.

Mining such data can help us to deal with short-run risks, and both surveys this year attempted to do so. On balance, their findings are still somewhat depressing, but the condensed wisdom of a century is still useful.

First, equities do outperform in the long term, but that long-term can indeed be very long. In the US, since 1900, the longest anyone has had to wait to derive a positive real return from stocks is 17 years (manageable for most of us); but in Italy that figure is 74 years.

How should those with time to wait best harness this insight? The Credit Suisse data confirm that stocks outperform if they are smaller (US micro-cap companies have grown at 12.6 per cent per year since 1926, compared with 12 per cent of small-capitalisation companies, and 9.5 per cent for larger companies); if they are cheaper (higher dividend yield stocks have risen at 10.9 per cent per year in the UK since 1900, compared with 7.7 per cent for low yielders); and if they have momentum at their back. Stocks that are rising tend to keep rising, and laggards tend to keep lagging. Place trades that take advantage of these inefficiencies and you will be rewarded in the long run.

 

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