Jul 15, 2020
Recently, we have been observing numerous claims that small-cap investments will no longer outperform large-cap investments due to a variety of reasons. However, the empirical data still strongly implies that small-cap stocks tend to outperform large-cap stocks. In today’s episode, we dive into the details of whether we should expect this trend to continue and how you can use this idea to make better investment decisions.
[02:13] Background – Small-cap stocks used to get less interest from large institutional investors. Grant explains how this trend shifted due to the prominence of index investing.
[06:53] Why Small-cap Stocks Performed Better - Grant reviews several factors that contributed to the better performance of small-cap stocks compared to the large-cap counterparts.
[11:00] Recent Changes – Although small-cap stocks used to perform better, that seems to have changed in recent years. This change leads to the argument that small-cap stocks may not continue to outperform large-cap stocks. Grant gets into details of two contributing factors to this change.
[16:29] Going Public Eventually – Due to regulatory burdens and availability of other means of gaining capital, more and more companies avoid or delay going public. However, many of these companies will continue to grow and eventually go public. Grant explains a couple of examples of this phenomenon and what it means for small-cap investors.
[21:49] Vanguard’s Study on Falling Number of Public Companies – Grant reviews the findings of a study by The Vanguard Group that revealed why the number of publically listed companies decreased in the last 20 years.
[25:51] Professionally Managed Investments – Why it’s less risky for investment managers to favor large-cap investments over small-cap investments.
[32:23] Final Thoughts – Grant sums up why he does not believe that small-cap premium is gone and some suggestions for those who are investing in small companies.
Vanguard Research - What’s behind the falling number of public
Understanding Small-cap and Big Cap Stocks: