I’m in a reflective mood; so please bear with me. As I look back to the start of my business, my primary goal was to create greater value (“alpha”) to clients’ accounts that were over and above what the stock market (S& P 500 index) could achieve. From the early 90s to mid-2007, the micro-cap strategy, in conjunction with larger stocks, was very effective. The alpha that was created for an average client account was far greater than reflected in the major stock indices. Every couple of years during that period, there had been one or more stocks that performed extraordinarily well and allowed us achieve significant gains. GCM was extremely proud and confident of our performance and future prospects. Since mid- 2007, there have been: banking failures, worldwide recessions, dysfunctional governments (what’s new?), distrust of Chinese companies, growth in ETFs and rapid computerized trading and now the European crisis. All of these factors have contributed to a drastically changed investment landscape, particularly in the micro-cap sector. Bottom line – the micro-cap strategy has not worked well since mid-2007.
For every micro-cap company GCM owns, there are approximately 4 times as many that we also follow. What is evident is that, with few exceptions, the stock performances of small companies are dismal, overall.
Have our companies’ stories changed? For the most part the answer is NO, but few dollars are entering this sector to support stock prices. (If you refer to my last newsletter re:White Mountain–The stock price has dropped precipitously since March 31 but the story remains intact.) Billions of dollars are being removed from this sector, the result of disconsolate money managers and individuals simply throwing in the towel. There are so few long-term strategists out there, due to an unwillingness to wait. The new (aka: modern) investor is an impatient animal. The notion of research-based decision-making and long term thinking is becoming a thing of the past.
So, where does this leave us? The answer may be two-fold. Personally, I am comfortable sticking with my small company strategy due to the intimacy and knowledge I have with these companies. I am willing to wait.
I’ve always believed that when things are perceived to be at the lowest point, it is traditionally the best time to invest. But it has been this way for several years. That said, a sizeable weighting in smaller-caps may no longer be appropriate for clients. This is not to say that I will be selling our micro-cap positions at this time, but going forward (and until there is supportive evidence), fewer dollars will be allocated to this sector. In the future, greater dollars will be put into larger companies (preferably dividend paying).
I’m also keenly aware that things in this sector can turn around in a hurry. To illustrate, the above paragraphs were written on 6/27. Just before going to press, significant news/info came out on both White Mountain-WMTM (by far the best news in the history of the company) and Unipixel. After telling my now graduated, working son, the WMTM news, he reminded me just how many decades it took Apple’s stock to be loved and appreciated. The small-cap sector is mired in pessimism, so perhaps if we stick with our contrarian ways….. ???
As John Templeton said – Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
All the best for a happy summer and continued break-out news!