Is it Time to Shift to Small Caps?
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Ida Hansen
Is it Time to Shift to Small Caps?
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It is hardly news that there has been a bull market for equities since March 2009.

There have been a few dips along the way, but the Dow Jones Industrial Average (NYSE: DIA) and the Standard & Poor’s 500 Index (NYSE: SPY) continue to perform well.  The Dow Jones Industrial Average is up for the last week, month, quarter, six months, and year market action (chart below).  It is much the same story with the Standard & Poor’s 500 Index.  For 2014, the Dow Jones Industrial Average is up 8.82 percent.  The Standard & Poor’s Index has risen by 12.86 percent since the first of the year.

But that has not been the case with small cap stocks, however.

The Standard & Poor’s Small Cap Index is up just 2.8 percent, trailing the larger cap gauges significantly.  There are many reasons for that.  Chief among them is that many institutional investors, such as mutual funds and pension groups, cannot invest in small caps.  There charters prevent them from investing in publicly traded companies beneath a certain price or market capitalization.

For the individual investor, that is a huge opportunity.

When there is less buying and selling by institutional investors, there is less liquidity.  Less liquidity results in a more inefficient market.  The resources are not there that result in more efficient markets.  For the savvy investor willing to patiently invest for the long term after performing due diligence, there is the chance to buy excellent small cap companies at a deep discount.

Legendary investor Warren Buffett claims that his most rewarding investment has been in See’s Candies, a small cap.

He stated in an interview in Fortune magazine that an investor can learn more from a small cap than a Coca-Cola (NYSE: KO) or an ExxonMobil (NYSE: XOM).  While Buffett is a major shareholder of both ExxonMobil and Coca-Cola, the benefits that increase the skill set of an investor from small caps is more rewarding



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