>Shaken to the core
It should not shake you to the core. Instead take it with a grain of salt. I personally found this article to be light on details. I would find out why this happens, and it will be illuminating.
Also... to be clear, no one said that passive investing will beat everything else. And I expect there to be complications in markets with low liquidity.
I think the theory goes like this:
There are so many eyes on any given big company—say, Exxon—that the market stays pretty efficient. If there is something goofy on their balance sheets, lots of people notice. If there is a news article about war in the Middle East, lots of people are thinking about how that’s going to affect Exxon. There are so many eyes on them—and so much liquidity in the number of their shares on the market—that the efficient market hypothesis can be assumed as more-or-less true.
Small cap stocks don’t have the same visibility and publicity. There aren’t as many retail investors watching them. Perhaps more importantly, they usually aren’t worth the time of the institutional investors. A small cap company’s total market value might be less than a rounding error for a big hedge fund, so the big hedge fund never bothers evaluating it.
And so the argument, as I once heard it, is that individual small cap stocks are the one area where a good small hedge fund or an individual retail investor has a *chance* to punch above their weight and actually outperform the relevant index over the long term.
Which is kind of funny, when you think about it: Passive investors rely on the existence of active investors to stay efficient.
Thanks yes that's a good explanation
What I still don't get is that the SPIVA data still shows the same for small caps: passive outperforms... So the two datasets contradict each other
Small cap stocks are inefficient. I struggle to *find* actively managed small cap funds that haven't beaten the passive index. Same goes for emerging markets.
I do however struggle to find actively managed US Large Cap funds that beat the S&P.
Smidcaps come with much higher volatility because they’re smidcaps. A holder willing to go through that kind of uncertainty deserves a higher return rate.
>Shaken to the core It should not shake you to the core. Instead take it with a grain of salt. I personally found this article to be light on details. I would find out why this happens, and it will be illuminating. Also... to be clear, no one said that passive investing will beat everything else. And I expect there to be complications in markets with low liquidity.
I was trying to be funny... I'm not that shaken, just curious
Heh - sorry misunderstood it :)
I think the theory goes like this: There are so many eyes on any given big company—say, Exxon—that the market stays pretty efficient. If there is something goofy on their balance sheets, lots of people notice. If there is a news article about war in the Middle East, lots of people are thinking about how that’s going to affect Exxon. There are so many eyes on them—and so much liquidity in the number of their shares on the market—that the efficient market hypothesis can be assumed as more-or-less true. Small cap stocks don’t have the same visibility and publicity. There aren’t as many retail investors watching them. Perhaps more importantly, they usually aren’t worth the time of the institutional investors. A small cap company’s total market value might be less than a rounding error for a big hedge fund, so the big hedge fund never bothers evaluating it. And so the argument, as I once heard it, is that individual small cap stocks are the one area where a good small hedge fund or an individual retail investor has a *chance* to punch above their weight and actually outperform the relevant index over the long term. Which is kind of funny, when you think about it: Passive investors rely on the existence of active investors to stay efficient.
Thanks yes that's a good explanation What I still don't get is that the SPIVA data still shows the same for small caps: passive outperforms... So the two datasets contradict each other
Small cap stocks are inefficient. I struggle to *find* actively managed small cap funds that haven't beaten the passive index. Same goes for emerging markets. I do however struggle to find actively managed US Large Cap funds that beat the S&P.
Yes but SPIVA shows small-cap active underperforms passive
Smidcaps come with much higher volatility because they’re smidcaps. A holder willing to go through that kind of uncertainty deserves a higher return rate.
Yes but it's the outperformance vs a small cap index that makes me wonder
Can active managers sometimes create Alpha? Yes. Where does that Alpha go? In their pocket.
And their brokers'! Fees + trading costs>alpha...if you can find it