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Small is Beautiful

Christian Armbruester

Investing in smaller companies bears a lot of risk. Foremost, there is the so-called idiosyncratic type, which comprises all that could go wrong before a business model matures. There is also less liquidity in smaller stocks, which means more volatility when financial markets correct. With higher risks usually come higher potential returns, but apparently, the larger stocks didn’t get the memo.


In the last five years, the Russel 2000 has underperformed the S&P500 index by 45.27%. Covid had a lot to do with that, or rather the inflation it caused. For companies that rely on cheap financing to grow, rising interest rates can be somewhat debilitating. Never fear, the Fed is here and even the most diehard Apple or Nvidia owners must take profits sometime.


Lo and behold, since August 15th, small caps have outperformed the S&P500 by 3% and even more impressively, the Nasdaq by 6%. Could this be the beginning of a trend that could be our friend for a very long time? Lest we forget, it wasn’t always like this and in the two decades prior, the Russel consistently outperformed most other US indices.


Technically, the index has come a long way, up 40% in the last twelve months it looks poised to make more gains. For a fundamental investor, it will always be difficult to get over the 860 out of the 2000 companies in the Russel index that are unprofitable. What we do know is that when small stocks do better, markets generally have also done well. Definitely something to watch, and long may it continue.

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