True, but small caps as a tactical play are a strategy of the past, it seems, when information about companies was harder to come by.I have no idea what tomorrow's darling will be, but it most likely is something nobody is imagining doing well today.
I found the discussion previously cited on Rick Ferri's podcast enlightening: Bogleheads on Investing with Aswath Damodaran: Episode 77. And it exposes another issue with extrapolation from the past.
Aswath Damodaran (Professor of Finance at the Stern School of Business at New York University, where he teaches corporate finance and equity valuation):
It's not so much that "this time is different", I think. More like every time is different. Things keep changing. And when you look at an investing strategy that worked in the past, you have to ask yourself why, and then whether or not that reason still exists. Does that make sense?1927 through 1980 looks very different from 1980 through 2024. Take the small cap premium. Huge between 1927 and 1980, almost 7%. Since 1980, there’s been no small cap premium. None. It’s zero. It’s gone.
I’m convinced that at least between 1927, 80, there were good reasons why small cap companies earned what looked like excess returns.
Information on them was difficult to get. There were all kinds of corporate governance issues transacting on them. I’m old enough to remember when I had to call a broker to buy a stock. And if you tried to call a broker to buy a small Nasdaq stock in 1980, the hoops you had to jump through, the costs you face were insanely high. One of the things that changed is we live in a very different world. And maybe the reason the small cap premium has disappeared is. I can go to the SEC website, pull up the last 20 years of financials for even the smallest company.
And I can trade effortlessly through my brokerage, slightly higher bid, ask spread. But the difference is between small and large companies from an investor perspective have narrowed. And if they’ve narrowed, maybe the small cap premium has disappeared for a good reason. So some of these factors I think had good reasons for the original premiums. They were not excess returns. They were returns for something that you are facing that you were not capturing in your models. And I think those factors have shifted because we live in a very different world as investors and we’re capturing that in our returns.
Statistics: Posted by littlerfish — Sat Oct 25, 2025 9:12 pm — Replies 122 — Views 11532