Micro-cap Stocks
Evidence for Outstanding Returns
Historical evidence suggests that investing in microcap stocks (very small companies with a market value of $25 million or less) is particularly fruitful for small investors.
Yet microcap stocks rate few mentions from fund managers or market commentators.
Why should this be?
Imagine you discovered a reliable investment into which you could invest 1c each year for an annual profit of 1c. The return, 100 percent, is fantastic but the profit would not help your personal bottom line. You wouldn't be interested in the investment because a 1c profit wouldn't be worth any effort.
Similarly, big movers and shakers are not interested in very small stocks whose trading volumes run into just a few thousand dollars each day. It's not worth their time. Fund managers deal in stocks whose liquidity allows very large parcels of shares to be bought and sold with ease.
Yet investing in tiny companies offers the best historical returns - not just beating the market average by a little, but beating it by an enormous margin.
Evidence for this can be found in What Works on Wall Street, by James P. O'Shaughnessy. O'Shaughnessy was the first outsider to be granted access to the renowned S&P Compustat Database. The database contains comprehensive fundamental and technical data reaching back as far as the 1950's.
O'Shaughnessy used the Compustat data to back-test various investment strategies.
He discovered that every $1,000 invested in microcap stocks yielded in excess of $80 million in the next 45 years. This is an astoundingly high return on capital and is more than 60 times better than the next best investment strategies; these returned $1 to $1.3 million. O'Shaughnessy's strategy involved an annual realignment of the microcap portfolio. Stocks which had outgrown their former microcap status were sold. Stocks which had recently acquired microcap status were bought.
Investing in microcap stocks is a powerful strategy. Unusually, it's a powerful strategy that is available only to small investors.