The Simple Secret to Investing in Small Caps
The secret to investing is simple - figure out the "real" value of a company and then attempt to pay a lot less. Unfortunately, for most investors it's extremely difficult to figure out the value of a company. So most of us leave it up to the professionals to make the decisions for us - and most professional money managers, particularly mutual fund managers, have just as difficult a time trying to beat the market.
According to
the Standard and Poor's rating agency, "over 90 percent of all mutual funds fail
to keep pace the major market benchmarks over the long
haul."
In a recent article with RegisteredRep.com, hedge fund guru and famed author Joel Greenblatt takes a look at why so many actively managed mutual funds fail to outperform the major market benchmarks over the long-term, and offers insights on how the retail investor can beat the market.
Greenblatt states
that "a big impediment to beating the market that all managers must
overcome is fees." Actively managed mutual funds will immediately
chop 1 percent to 2 percent off of your profits just for participating in
the fund.
(Incidentally, if
you're looking for a way to buy stocks without paying a single penny in
transaction fees, or fees of any kind, you're in luck. I just completed a
special report on how to do so. You can read all about it
by clicking
here now.)
Another problem, he says, is that the quest to
accumulate assets (which funds want because it leads to more money made
in fees) often can hinder performance.
"To get big and take large positions, fund
managers tend to go for big, well-known stocks," Greenblatt writes.
"But, there can be big advantages to looking at smaller companies.
These companies are often too small for large investment funds to buy and
for Wall Street firms to spend money on doing research. Less competition
from other buyers and less available Wall Street research often mean a
greater opportunity to find bargain-priced stocks among these
lesser-followed small-cap companies."
Greenblatt says successful investors like Warren
Buffett wish they were still able to take advantage of small-cap
bargains. And, Greenblatt says, by the time you've heard of a successful
fund, it's probably so big that it can no longer benefit from such small
stocks.I can't agree more with Greenblatt's
sentiment. Case in point: I just sold the Fairholme Fund (NYSE: FAIRX).
When I first bought this fund it had about $7 billion in assets. Today,
the fund has over $15 billion in assets - and the performance was
starting to suffer because of the size.
So I sold my holdings for a nearly 50% gain, and reinvested those funds into a smaller fund. If you're interested, I've made it possible for you to take a look at my portfolio right now. Click here to find out how.
So where to small cap companies come into the mix?
Small caps are often too small for large, actively
managed mutual funds. Less competition from other buyers and less
available Wall Street research mean a greater opportunity for small cap
investors.
Remember, there are over 15,000 micro and small
cap companies internationally so small cap investors have a huge
opportunity to outperform the market over the long haul.
The ability to choose among the thousands of micro
cap and small cap stocks with little to no competition among the Wall
Street big wigs gives us, the small cap investor, a huge advantage.
Again, this is a luxury that Warren Buffet, George Soros and the like
wish they still had.
It might seem like I'm a broken record about small
caps - but as an asset class they really give you a leg-up on other
investors, because you can do your own diligent research and find
diamonds in the rough. In some cases, you might be one of a hundred
investors finding the same valuable information.
That means you're in on the ground floor.
