Todd, thanks for the chart. I was looking more for some play-by-play from some of the fine writers on the thread. You know, about how the longs stormed over the gunwales and the shorts sank beneath the oil-black waters, never to be seen again. That sort of thing.
In terms of the small cap discussion, this was on TSC last week:
thestreet.com
It's a quant article showing that the reason why big mutual funds can't play in the small cap arena is the high transaction costs. Essentially big money moves a small, illiquid stock too much. But hey, for those of us with under $3 million, we're set. :)
I don't think it is a question of sticking with small caps to try to get some kind of historical 2% outperformance over big caps. It's a question of following your method of finding the handful of companies that are great bets and trying to hit some homers.
An excerpt from the piece:
BARRA notes that any measure of trading cost will be greatly
underestimated because of the tendency of
portfolio managers to submit
trades in a realistic fashion. Portfolio
managers want their trades to be
filled, so most large orders are naturally for
large-cap, liquid names. The
opportunity costs associated with such
self-censorship are substantial.
Investors managing less than $3 million in
assets, on the other hand, can
establish a meaningful investment position in
small, illiquid names
relatively quickly. Why do individual investors
focus on smaller stocks than
the pros? Because they can.
A model developed recently by DLJ adds an
interesting and useful twist to
the measurement of market impact by splitting
the cost into two portions --
the direct impact from the trade and an implied
cost associated with the
time the trade takes to complete. In a study of
billions of dollars of
transactions, DLJ found that the timing cost
was six times more significant
than the direct market impact cost.
Specifically, the cost of commissions
plus direct market impact was $0.05 per share,
while the cost of delay in
filling the order was $0.30 per share.
I see this as an exciting finding, because it
highlights the advantage
enjoyed by individual investors in regards to
overall trading costs. Because
of the integration of the small order execution
system (SOES) into the
online brokerage trading mechanism, individual
investors can usually get
a transaction filled promptly at the asking
price. This cuts out the timing
cost, which according to DLJ is 85% of the
total trading cost.
Put another way, individual investors enjoy a
7-to-1 advantage in trading
costs by managing their own account rather than
pooling their money in a
mutual fund. |
