Monday, May 16, 2005


Small caps under pressure

Down $9 today (8 dollars and 86 cents to be exact). Meanwhile, the market continues its upward surge. This has not been a good time to be in small caps. As this chart shows, for the past few years, small caps have been the place to be. And that is why my portfolio is almost 100 percent smallcap. However, this has changed over the past couple of weeks, with the small cap Russell 2000 underperforming the major indices. This trend has intensified over the past 5 trading days. Is this the start of a prolonged trend? I don't know. One thing I do know is that it's much harder to find bargains among small caps then it once was. And indeed, the data validate this: the average P/E of small caps is now larger than large caps, a reversal of what was the case 2 years ago. Still, I think it's virtually impossible to outperform the market if you invest mainly in large caps. The market is just too efficient for that. So until I have been proven drastically wrong, I'm going to stick with the small caps.

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