The Little Book of Market Myths: How to Profit by Avoiding the Investing Mistakes Everyone Else Makes

Chapter Nine

The Perma-Superiority of Small-Cap Value

“Small-cap value stocks are just better than other stocks.”

This is a myth many professional investors and hard-core enthusiasts tend to fall for—the belief that small-cap value is inherently better and prone to long-term superiority moving forward, forever and ever, world without end, Amen.

It’s not true. Were it, we’d all know it, and everyone would invest in small-cap value, only. But there are also hard-and-fast (equally misguided) adherents to other equity size/style/categories. Some folks only buy large growth. Others buy only Tech. Only US. Only blue chips. Only British mid-cap Pharmaceuticals. Only this. Only that. Name a category, and there’s a fan group that believes it’s found the long-term silver bullet—its beloved category is best, no analysis needed beyond that. Yet no matter the depth of their love for [insert category here], they can’t all be right. And in fact, none are.

Perma-Love or Heat Chasing?

Another big feature of this perma-love: Often, it isn’t so permanent. Yes, some small-value disciples rigidly and adamantly hang on, even during the (sometimes, excruciatingly long) periods small value underperforms, so firm is their faith. But there are some who, after watching a category go on a tear for some time (large growth in the mid- to late-1990s, Tech in the late 1990s, Financials in the mid-2000s, foreign in the 1980s, US for all of the 1990s, Emerging Markets in the late 2000s, etc., etc., etc.), think, ...