Small Cap Nonsense

There is a very annoying notion in parts of the money management community that managers can only add value in the small cap sector. The theory goes that large caps are analyzed by so many people that there is simply no way to outperform, while small caps lack coverage and a manger can add value. A decade long run of small cap outperformance gives the people who espouse this theory even more confidence in their assertion even though it should give them pause.

Like with any other asset class, at a certain price it makes sense to own large cap stocks and at a certain price it makes sense to own small cap stocks. Am I supposed to buy a less liquid small cap stock at a far more expensive valuation because there is a theory that I can only outperform in small cap stocks? No thank you. John Hempton at Bronte Capital has two articles where he pulls no punches that I would highly recommend on the subject.

Article 1

Article 2

3 comments:

Onlooker from Troy said...

Hmmm, sounds like efficient market theory, no thanks.  As if the buyers of large caps don't display the same kind of swings in sentiment, etc. as the small caps.

Keep doing what you're doing Tsachy.  The record is what counts, not the herd's theories.

frank r said...

You won't pull off a Sanborn map operation (http://www.ticonline.com/buffett.partner.letters/1961.01.30.pdf) with large caps, and you are unlikely to have access to information that isn't publicly available to everyone else, but that doesn't mean there isn't plenty of room for strategic thinking with large caps. And after the 2008 debacle, how can anyone believe there isn't opportunity for those who can think strategically?

Tsachy Mishal said...

You would be surprised as to how this notion is accepted as gospel in large parts of the money management world. Obviously I agree with you.