| MODULE 16 |
| WHY YOU WILL NEVER OWN MOST OF THE BEST GLOBAL STOCK OPPORTUNITIES IN THE WORLD IF A LARGE INVESTMENT FIRM MANAGES YOUR STOCK PORTFOLIO |
Definitions You Will Need For this Lesson:
Although these definitions vary somewhat depending on who you consult, in general most definitions of large cap, small cap and micro cap stocks fall within the range of the definitions below.
Large Cap Stock: Companies with a market capitalization between $10 billion and $200 billion.
Small Cap Stock: Companies with a market capitalization between $300 million and $2 billion.
Micro Cap Stock: Companies with a market capitalization between $50 million and $300 million. |
Let’s quickly review some facts. There are estimated to be about 75,000 stocks traded globally, approximately 15,000 of which are traded on the U.S. markets alone. Of these 15,000 stocks, there are about 6,000 micro cap stocks and there are several thousand more small cap stocks.
According to a University of Chicago Center for Research in Securities Prices (CRSP) study that examined a 79-year period, micro cap and small cap stocks outperformed large cap stocks by 437% and 165% respectively. Investing in small companies also became safer in the U.S. in 1999 when the Securities Exchange Council (SEC) passed stricter regulations for small publicly traded companies.
However, most investment houses, even the largest corporate giants, only have the resources to only track about 1,500 stocks. They have to track the most popular stocks that most people own, so most of the stocks they research are large cap stocks such as General Electric, Microsoft, Home Depot and so on.
In fact if you look at all the stocks analyzed by ALL the Wall Street firms in the United States, this number amounts to only about one-third of the 15,000 stocks that trade only in the U.S. markets.
When you add another 60,000 foreign stocks into the mix, you can begin to see how many mid, small, micro and foreign stocks are completely ignored by Wall Street. For this reason alone, your stock portfolio will almost never experience the returns it deserves. I would estimate that more than 95% of financial consultants at large investment houses do not follow small and micro cap stocks simply because their firms do not provide adequate analysis of these types of stocks.
Why small caps? The answer is as simple as it is logical. An Ibbotson Associates study showed that over a 71-year period, from 1926 to 1996, small cap stocks returned 12.6% annually while large cap stocks returned 10.7% annually. While this difference doesn’t sound huge at first, the compounding effect ensures that this difference is huge.
Without taking taxes and inflation into consideration for the sake of simplicity, $1,000 invested in a small cap stock index in 1926 would have grown into about $7,251,143 by 1996. $1,000 invested in a large cap index in 1926 would have grown into just $1,909,225 by 1996 in comparison.
All of a sudden that small difference in return does not look so small anymore.
As an example of how much large investment firms are laggards when it comes to uncovering small, micro-cap and foreign stocks, we at SmartKnowledgeU, uncovered a Chinese advertising company called Focus Media in December, 2005 using our MoneyPing™ Strategy No. 3 at an entry price of about U.S. $31 a share. In the third week of May 2006, six months later and U.S. $31 higher, a Morgan Stanley analyst put out a report, calling Focus Media a “top pick” at an entry price of U.S. $62 a share.
So what does this mean?
Learn to uncover the best global stock opportunities yourself here or settle for mediocre returns with a large investment house.
Content: 14 pages
Number of Lessons: 7
Exam Questions: 13
Estimated Time of Completion: 1 ½- 2 hours
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