Where were you on the evening of Sept. 26, 2003? And did you have more money than you have now ... or less?
Me, I was working on a column like this one. And looking back, I may have stumbled on two curious facts that could have made us both some money.
Don't worry, you can still cash in
In case you weren't with us back in 2003, I'll give you a quick recap. After all, I think the bull case is still pretty compelling.
- I still don't believe the rally in small-company stocks is kaput.
- If you don't have small stocks in your portfolio, don't assume you're covered by your mutual funds. Not even so-called total market funds.
I'll explain why in a moment. But first, back to September 2003, when a lot of "experts" were calling an end to the small-cap rally. I didn't buy it then (and I hope you didn't, either).
Instead, I told you how I had loaded up on the iShares S&P SmallCap 600 Growth (IJT) the previous January at around $65. Then, I suggested you still had time to buy it yourself and make some money. If you did, you're sitting on another 87% gain. And that's on a diversified index. Well done.
Why you should keep it small
I won't rehash my argument here, but a few points are worth noting. First, we were heading out of a recession, and small-cap growth stocks are notoriously hot during recoveries. More important, we hadn't nearly made up the ground lost during the '90s mega-cap lovefest.
The first point is no longer true, but don't sleep on the second. I catch my share of grief for harping on how difficult it would be for a massive operation like Ford
I would argue that even if Ford did double its revenues, the stock could still let you down. After all, there are any number of large-cap stalwarts with solid revenues and earnings, whose stocks have lagged since we last spoke in September 2003. That is what I call an uncomfortable morning after.
But we're just getting buzzed
Plus, even if I am irrationally exuberant about small caps, it's not the end of the world. In my view, the advantages of small companies extend beyond relative valuations. Small companies are more agile and better poised for growth than the behemoths we hold in our "total market" index funds.
That's why I'm a fan of Tom Gardner's Motley Fool Hidden Gems approach. For one thing, Tom invests from the bottom up. When you focus on specific companies, you don't need across-the-board strength in a market, sector, or investment style. And with small caps, you get another bonus -- if you know how to play it.
There's less information on smaller, more thinly traded stocks. As a result, the market is less efficient, and, as Tom is fond of explaining, the lack of interest in these stocks keeps you out of crowded auction-house bidding wars like the one that broke the bank for large-cap investors in 2000.
Finally, the problem with your mutual funds
Don't assume you're covered even if you own so-called total market funds. In fact, these funds are dominated by large-cap growth stocks. Which means that you're holding a lot more $67 billion old-school Time Warner
Put another way, while you think you own equal chunks of 3,632 stocks, you don't. Even in a so-called total market fund, you always have much more exposure to a $135 billion ConocoPhillips
In fact, just 10 massive stocks make up more than 15% of your "total market" portfolio. That's why a modest jump in Citigroup
What to do right now
Even if you agree that mega caps are due, you still shouldn't dump your small-cap stocks. History proves that many (if not all) of tomorrow's Goliaths are Davids today. And unlike with Time Warner or ConocoPhillips, an extra $1 billion in earnings could instantly propel you into a whole new tax bracket.
If you think that sounds like some sweet action, you should give Hidden Gems a try. Tom and his team of analysts have already turned up two dozen stocks that have doubled in value or more. And he has me convinced that a 10-bagger is on his buy list right now
So, if you're looking for small-cap ideas and advice, that's where I'd start. In fact, you can take a free trial starting right now and check out all Tom's picks, including his top five recommendations for new money right now. If you're not impressed by what you see, don't subscribe and don't pay a penny. To see what I mean, click here.
This article was originally published on March 24, 2006. It has been updated.
Fool contributor Paul Elliott promises to keep you posted on the progress at Hidden Gems. As of Oct. 25, 2007, the picks are up 57.5%, versus 22.7% if you'd bought the S&P 500 instead. You can view them all on our scorecard with your free trial. Paul owns shares of the iShares S&P SmallCap 600 Growth ETF. Intel is an Inside Value pick. Time Warner is a Stock Advisor recommendation. The Motley Fool has a disclosure policy.
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