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Discussion Starter #1
It is sometimes said that small cap and value stocks outperform over the long haul.

Is this generally a good time to invest in either?

I have also heard that large caps should outperform small caps going forward from here. Is this likely?
 

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Large caps do better at the start of a bear market as everyone runs from the risky small caps into the more stable large caps before they all go to hell.

You have to also ask why can't small caps have value as well. Small caps do worse when things go bad because they lack the liquidity that the large caps have to offer.
 

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It is sometimes said that small cap and value stocks outperform over the long haul.

Is this generally a good time to invest in either?

I have also heard that large caps should outperform small caps going forward from here. Is this likely?
I would say a better strategy is called Diversification and you need to own both Small and Large Cap stocks to be efficient.

They both do well at different times, and even at the same time.

You cannot lose by owning both.
 

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You cannot lose by owning both.
If only it were that simple. ;)

The other posts basically covered it, though of course smallcaps can also be value stocks. Liquidity is not the main reason smallcaps are generally bad to hold in a recession...
 

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It is sometimes said that small cap and value stocks outperform over the long haul.
It's not just sometimes said; it's a fact. Google Fama-French Three Factor Model.

Is this generally a good time to invest in either?
If you have the money, it's always a good time to invest. ;)

I have also heard that large caps should outperform small caps going forward from here. Is this likely?
I have no clue, so I own both.
 

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For someone like belguy, small caps are more volatile. So when you watch your portfolio every day, small caps will give you heartburn! But since your following the couch potato portfolio, why does it matter?

You will liquidate any superior performance during rebalancing.
 

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It is sometimes said that small cap and value stocks outperform over the long haul.

Is this generally a good time to invest in either?

I have also heard that large caps should outperform small caps going forward from here. Is this likely?
Smaller cap companies have more growth potential than large cap, expressed as a %.
You can't have giants like IBM, MSFT grow at say 9% a year.
However smaller, newer companies often grow at double digits every year, if they don't go out of business, that is.
Smaller businesses face several unique challenges, such as higher borrowing rates, difficulty in securing funds during credit cruches (like 2008 - 2009), being run over by larger competitors, hostile take-overs, being at the mercy of govt. policy rather than help frame it, etc.

So there is more uncertainity and volatality with smaller businesses and the risk of losing everything exists as well.
But the reward is double digit growth rates.

That said, I feel small cap mutual funds and even ETFs are perhaps not the best way to invest in small cap businesses.
Mutual fund fees will eat away a lot of the returns.
Also the diversification hurts returns.
More small cap businesses will go under or badly underperform.
You are betting on small handful of companies making up for the underperformance of the vast majority.

I took a quick look at the small cap funds offered by the major players.
Most 10 year returns are in the 3 - 5% range.
Those that have been around for 15+ years have managed between 6 to 7%.
Following examples:
http://www.scotiabank.com/cda/content/0,1608,CID9471_LIDen,00.html
https://www.tdassetmanagement.com/Content/Products/MutualFunds/Funds/p_FundCard.asp?FID=422&TAB=PRICE&PID=5&SI=4

Fees tend to be higher, and even if we account for the 2% or so extra markup of mutual funds vs. ETFs, the returns are still not compelling.

On the other hand, if you can identify, research and invest in smaller cap companies individually, you can have better returns.
Of course, the risk is you may lose all, unlike an ETF/fund, but the potential for returns is much higher if you invest the time and pick wisely.
Easier said than done, but that's the game we are all playing.
 

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Discussion Starter #9 (Edited)
As I have stated before, I have read that the fees charged by managed mutual funds generally do not add value compared with just holding index products. However, two exceptions, that I remember were for smallcaps and emerging markets investments where a manager could well add value as opposed to investing in an index.

That said, Vanguard does have a small cap, value ETF:

https://personal.vanguard.com/us/FundsSnapshot?FundId=0937&FundIntExt=INT
 

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Peter Lynch's claims all you need is one stock in a basket of 10 small caps (or value stocks) to go 5-10 fold and you will make it big. 2-3 could underperform but you will still gain big.

However this is a little bit beyond my risk tolerance and confidence level of picking successful 3-10 bangger stocks, but food for thought none the less.
 

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As I have stated before, I have read that the fees charged by managed mutual funds generally do not add value compared with just holding index products. However, two exceptions, that I remember were for smallcaps and emerging markets investments where a manager could well add value as opposed to investing in an index.

That said, Vanguard does have a small cap, value ETF:

https://personal.vanguard.com/us/FundsSnapshot?FundId=0937&FundIntExt=INT
The returns are pretty mediocre.
The managed mutual funds from Canadian banks have better returns, although hardly compelling.
Emergeing markets are a different story.
In those cases, I'd almost certainly go with an ETF.
In all emerging markets, rising (and falling) tides raises (or sinks) all boats, in most cases.
If I were itching to venture into the small cap world, I'd rather invest the time to locate, research and go with a small set of selected companies.
If the bet(s) work out, great.
If not, oh well, at least you tried.
Keep the small cap allocation very low overall if you are risk averse.
 

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Peter Lynch's claims all you need is one stock in a basket of 10 small caps (or value stocks) to go 5-10 fold and you will make it big. 2-3 could underperform but you will still gain big.

However this is a little bit beyond my risk tolerance and confidence level of picking successful 3-10 bagger stocks, but food for thought none the less.
The typical mix is one 10 bagger, one bankrupt and 8 regular performers. But every one of them has the potential to be a 10 bagger. And it takes a lot of work because the crucial information is not readily available.
 

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when buying microcaps i tend to choose companies that are local, because news about them is often published in the local french dailies & weeklies but not carried in the national english media.

luck plays a role here since the beauce region of quebec (large area south of quebec city, begins east of montreal around sorel & drummondville) has historically been the home of strong entrepreneurial talent. This is probably not known in western canada or even in ontario. And the beauce is famous for voting federal, not PQ. Bombardier, Cascades & Maax are 3 of the well-known names that came out of the beauce, but there are many more smaller & less-known companies.

i watch them closely, checking insider trading reports, technical signals & even the well-known message boards where the pumps & bashers congregate (it's easy to discard the paid touts, and a surprising number of genuine stock owners do post on the leading boards; as many have noted before me; it's particularly the nay-sayers who will offer sharp insights into a company's weaknesses.)

quite apart from the fact that these companies, by & large, have done well for me, i have a strong sense of neighbourly pride in their accomplishments. I really enjoy owning their shares. Usually, at some point in time, i will phone their cfo with a question or two. Sometimes the ceo takes such a call. Invariably, they all speak with the same blend of courteous gallantry & smarts that characterizes business in quebec. It's as if they have taken the best from france plus the best from the USA.

right now, i don't have any quebec micros. I'm thinking about taking up boralex again - this will be the 2nd or 3rd round - although this quebec-and-france-based energy company is a midcap now and no longer an innovative spinoff from cascades paper.
 

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From what I've read the feelings are that small cap does better coming out of a recession, as there is less fear and more money goes into smaller companies.
That's just a simplistic explanation.

The Fama/French three factor model is actually quite simple.
They are two economists that showed that 3 "factors" in investing have done best historically.

The three factors are:

1) equities..( stocks)
2) small cap
3) value

What they showed is that over longer time frames buying small cap value stocks bring the best returns. Remember...long term.

VANGUARD has a small cap value ETF..symbol VBR..( as BELGUY suggested)

It has a cheap mer at .14%
Small cap mutual funds will cost you near 3% in total.
To my mind VERY few managers will beat the ETF by more than their fees over any reasonable holding period.
nd if you buy small caps, you should hold them,,not constantly trade them.

It did very well coming out after the market lows of feb, march 2009, as would be expected, but may be a bit pricey right now, although it has not returned to its highs of 2006-7

So if youd like,,diversify...remember though that small caps as a rule do not pay dividends, or if they do, they are very low yielders.

If all else fails...buy the WHOLE market....total US and total World
Just use VANGUARD etf's.....symbols...VT, and VTI

Again,,,just my 2 cents worth
 

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quite apart from the fact that these companies, by & large, have done well for me, i have a strong sense of neighbourly pride in their accomplishments. I really enjoy owning their shares. Usually, at some point in time, i will phone their cfo with a question or two. Sometimes the ceo takes such a call. Invariably, they all speak with the same blend of courteous gallantry & smarts that characterizes business in quebec. It's as if they have taken the best from france plus the best from the USA...
This is the best way to invest. The personal connection makes a big difference. It is a sense of ownership and community that ETF owners cannot imagine.

I had that same opportunity here in BC with MDA, JSD and LLL and made out just fine while knowing the CEOs and senior staff. Now that I am retired and living in Mexico for 7 months, it is more difficult because the meetings tend to happen over the winter.
 

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Discussion Starter #16
Small caps perform better coming out of a recession because they are more nimble and better able to quickly take advantage of an improving economy while the large cap companies are still sitting on wads of cash.

However, we may be getting past that initial recovery period and large caps may perform better in the months ahead.

You pays your money and you takes your chances.

The only microcap businesses around here are all of the smoke shops on the reservation. Should I consider investing in any of them??:eek:
 

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Yes, small cap and value show increased return over the long term. The following is for index investors. William Bernstein doesn't recommend small cap and value investing outside a tax advantaged account. Compare a total stock market approach to a slice and dice approach. With small cap investing, there will be a tendency to more capital gains tax, as small caps become midcaps. With value investing, there will tend to be more dividends, and more taxes on those dividends. And his advice was directed towards Americans, where taxes on dividends are lower. At the top Ontario marginal tax rate of 46.4%, those increased dividends from foreign value stocks will be cut in half. You could make a case for tilting towards small cap and value in Canadian stocks. But the instruments to do it aren't as good as those available in the American market.
 

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well said, PARK

Thanks for those thoughts.

I do agree with you that small cap, and small cap value investing is much harder here in Canadian stocks.

Keep in mind though, that capital gains are capital gains, taxes paid on 50% of your gain, whether the gain was made on canadian stocks, US stocks, or intl stocks.

You make a good point on non-canadian dividends, which are treated as regular income here in Canada, but small caps tend to pay less dividends so the damage is muted somewhat.

Basically you would buy US or Intl small cap value for its diversification value.
 

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Discussion Starter #20
Just to take a look at the relative returns of some iShares ETF's over the past year:

LargeCap 60 (XIU): 7.67%
Cdn. Composite (XIC): 11.29%
Cdn. Growth (XCG): 10.76%
Cdn. Value (XCV): 9.78%
Cdn. Small Cap (XCS): 28.31%!!!!
Cdn. Completion (XMD): 24.72%

A while back, I sold my XIU position and split the proceeds between XCV and XCS.

So far, at least, I have not been sorry.:cool:
 
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