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Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: Jordan Levitt who wrote (113140)	2/13/2002 11:38:14 AM
From: Art Bechhoefer	Read Replies (1) \| Respond to of 152472

Jordan, I think you have hit on a key factor; namely, that smaller cap companies are not only more difficult to analyze but that large institutional investors can't devote much time to a company that is so small that a major investment would affect the stock price. Berkshire Hathaway still asks shareholders for ideas on companies worth considering. Many years ago, Berkshire still looked at companies with caps under $100 million. Now even $10 billion seems on the small side for Berkshire. There are about 500 really large mutual and pension funds that face the same predicament. They can't invest in small companies because doing so would affect market prices for those companies and also place fund holdings at risk if they had to sell in a hurry. The efficient market theory works best when one limits the market to stocks followed by the largest funds. In effect, these funds ARE the market (individual holdings are relatively small, except in cases like Microsoft). Precisely because smaller cap stocks are less influenced by investment decisions of large funds, the smaller caps may offer a better return to individual investors at modest risk levels. QUALCOMM, while it is now well above the typical definition for small caps (less than $1 billion market value), is still not much of a favorite of investment funds, making it possible for individual investors to get a better return than from a similar, but larger company (e.g., Motorola, Nokia). Art

To: Jordan Levitt who wrote (113140)	2/13/2002 11:53:00 AM
From: Wyätt Gwyön	Respond to of 152472

One area where returns seem to act differently is in small cap value. small cap value is the best performing sector historically. this is typically attributed to small value having a higher cost of capital (and hence hire expected returns). the worst category historically is small growth, followed by large growth (of which QCOM is an example). My own theory as to why, is that it is the hardest area to invest in, in that to find good small companies requires a great deal of work, and few are willing to do that sort of diligence actually, there are funds that go after small value. and you can go to a broker and sign up for a wrap account and be introduced to a portfolio of small value managers. these of course all have high expenses. the expenses involved in small value, or other less-frequented sectors (like internetional sectors, espeically emerging sectors) are much higher than for, e.g., US large value (i believe Bogle estimates costs for these "off-the-beaten-path type managers at well over 500bp--perhaps as high as 900bp). so one faces a high hurdle if going through a manager in terms of direct and frictional costs. however, there are small cap indexes as well, which naturally have much lower costs than the active managers (though not as low as large cap indexes). although promoters of active management like to make the argument that active managers are more likely to "outperform" in these "less efficient" sectors (nice marketing spiel), this argument has been contradicted by studies (see Bogle, Swedroe, W. Bernstein). in other words, indexing seems to work in these markets as well. indeed, Bogle suggests it perhaps works better than in the case of large caps, due to the greater cost advantage of indexes in the small cap realm.