Large Companies vs Small

SGH Wealth Management’s “Read What I’m Reading” July 2020 | July 10th, 2020

One of Nobel Laureate Eugene Fama’s most famous works came in the Fama-French 3 Factor Model that laid out areas of the market ripe for outperformance. One of these 3 factors showed that the size of the company had a consistent effect on long term performance and smaller companies have tended to do better than the market as a whole. There is still evidence of this today as seen in this chart from Bloomberg:

Enter 2020, where we have not only seen Large Caps outperform its counterparts (the opposite of the 3 Factor Model) but even in its own class there is wide dispersion of performance. As of yesterday, the S&P 500 Index was close to flat at approx. (-2%) for the year but when assessing its individual holdings, it becomes clear that 10 (to 50) companies are holding this market together. The stock market today is undiversified with much of its “eggs in one basket” and if something were to happen with these 10 companies it could spell trouble. These are the moments as investors that we cannot afford to ignore the benefits of maximal diversification.

A broken clock is right twice a day, but long-term performance comes in leaning into the statistical measures that have worked through many different historical periods. On average it takes over 22 months for a bear market to recover, which may be needed for the smaller sized stocks moving forward. What is also clear from the above graph is that when using traditional valuation methods, bigger company’s stock prices are relatively expensive compared to their smaller counterparts. In the efforts of selling high and buying low, these are important details to be aware of to adjust for whatever is to come.

See Video of Founder Sam Huszczo, CFA, CFP as Moderator in a discussion on Active vs Passive Investing During a Bear Market with Institutional Investor Magazine in the first link below: