We see this flowing through to investing. When seconds, or even milliseconds, of delay feel like forever in so many aspects of our lives, who is left to think about a stock’s potential over the years ahead? How many have the discipline to hold a position over the ups and downs it will inevitably have?
Ariel Investments, the $7 billion Chicago based manager, published a report that states, “More than 80 years of data support the case that microcap stocks have been by far the highest returning segment of the domestic equity market.” [emphasis added] The data is incredible. 98% of the time microcaps outperform large-caps for rolling 20-year periods. Historical annual microcap outperformance is hundreds of basis points, which has a mind-blowing impact on long term compounding, as illustrated in this chart.
$1,000 invested over various time frames
Source: Ariel Investments
No doubt, microcap investing takes work. Compared to larger caps, the smallest cap securities typically have less information available, less Wall Street coverage, less liquidity, and more market volatility. Microcap investors like us often have to put many hours in just to understand the basics of a new company we are looking at. And then we have to be willing to hold the position for some time until it works.
And in that is the opportunity. Others simply can’t be bothered with microcaps. With investor interest increasingly shifting to the instant—instant information, instant liquidity, instant returns—relatively few other institutions fish where we do. Sure, the fishing takes some work, but we feel we have the wind at our backs when we pick what we think are the best investments within the section of the market that we expect to continue to produce the best long term returns.