Archive for January, 2008
Thursday, January 31st, 2008
Any investment has associated risks. Please read our disclaimer.
It seems like investors are inundated on a daily basis with short term market headlines (especially now). This information, while useful and important, can be overwhelming and distracts from the most critical aspect investors should focus on: long term investing. The fact is, trying to time the market in the near term is an extremely difficult undertaking - one that many money managers fail miserably at. Still, many investors try their hand at market timing and ultimately lose money.
Small Cap Stock Investing as a Long Term Play
As an alternative, investors should focus on the long term while taking into account their risk profile. Investing in a diversified portfolio of small cap stocks can yield above average returns over the long term. Long term means 5-10 years, period (don’t kid yourself - be realistic about your capital requirements). However, I do not recommend that investors close to retirement or with near term financial responsibility (debt, children, college, etc.) maintain a large position in these types of stocks.
Don’t Be Myopic
In 2007, large cap stocks outperformed mid-cap and small cap stocks (this trend will likely continue). However, the good thing is that short term focused investors will neglect out of favor small and mid-cap stocks as a result. This could present a buying opportunity for long term focused investors.
The Value Proposition
Bottom line: small caps as measured by the Russell 2000 have outperformed large caps (Russell 3000) over the long term (see graph). There are several reasons for this. For example, small cap stocks typically experience higher variability in near term returns - this “risk” is essentially the trade off (remember, there is no free lunch on Wall Street). However, if we are focused 5 to 10 years in the future, we shouldn’t care what the 1 year or 3 year return is. Further, small caps offer a unique opportunity since they have the most room to grow. Think about it, even large growth plays such as Apple (NASDAQ: AAPL) were once small cap stocks.
Don’t Forget
The fundamentals of investing still apply: you must be diversified. Investing in a small number of stocks (of whatever size) is assuming a level of risk that I am not comfortable with. If one stock heads for bankruptcy you could easily lose most of your portfolio (and never get it back). That’s right, never. So, stay diversified, monitor the fundamentals, and stay focused on the long view.
Posted in Investing, Small Cap Stocks | No Comments »
Wednesday, January 30th, 2008
With investors and the media focusing so much on near term stock market conditions (especially with another Fed rate announcement due out today), I thought now would be a good time to take a step back and look at a longer term, big picture view of the market. So, I started slicing up stock data - starting with market cap.
Small Caps - Risk vs. Reward
What peaks my interest is the performance of small cap stocks over time. I had always assumed that investing in smaller stocks was too risky. However, while these stocks do carry higher volatility and higher risk (as measured by the standard deviation of returns) the trade-off may be worth it depending on a person’s risk profile. Why? Have a look at the chart at left (click to enlarge it). Over the last 5 years, small cap stocks as measured by the Russell 2000 index (RUT) have outperformed the broader market (RUA) by an annualized 2.5 percentage points per year (that’s significant!). So, is the risk / reward worth it? I’ll keep you posted - I want to make sure that I consider all of the facts first and share them with you - especially the risk metrics.
Posted in Small Cap Stocks | No Comments »
Tuesday, January 29th, 2008
World markets were mostly in positive territory as investors await the Federal Reserve’s announcement on interest rates tomorrow. Wall Street expects the Federal Funds rate (the rate which governs lending rates in the US) to fall about half of a percentage point from 3.5% to 3.0%. While this should boost the US economy in the short run, many worry that inflation could pose a long term risk as a result.
Posted in Investing | No Comments »
Friday, January 25th, 2008
In an attempt to steady the stock market in an election year, Congress revealed a plan to deliver $150 billion to businesses and consumers via an economic stimulus package yesterday. Bottom line: most individuals will get a $600 tax credit based on 2007 tax information ($1,200 joint) as well as an additional $300 per child.
Boosting Businesses & Housing
In addition, as part of the plan businesses now can write off half of their cost of capital purchases as well as deduct up to $250,000 for expenses (vs. the prior limit of $125,000). Also, in an attempt to revive a floundering housing market, the limit on government sponsored mortgages would be raised to over $600,000 from the current $417,000.
Posted in Stock Market News, The Stock Market | No Comments »
Thursday, January 24th, 2008
Ouch! French bank Societe Generale announced today it was the victim of fraudulent trading by a lone trader at its futures desk. The fraud is somewhere in the neighborhood of $7 billion, putting it well ahead of the Barings bank implosion of the 90s (subject of the film “Rogue Trader”). The news does not bode well for the bank, who’s stock has already taken a beating as a result of the subprime lending crisis.
Related Links:
IMDB - Rogue Trader (Starring Ewan McGregor)
Posted in Large Cap Stocks | No Comments »
