Comments, Comments, Comments

I have had more comments than I can respond to. Thankfully other readers have picked up the slack.

I wanted to weigh in on the dialogue between High Alpha and George. High Alpha points out that small cap value (scv) has been the best place to be and provides some data. George counters that large cap growth was it during the late 1990's and that things can change.

Both are correct but I think more color needs to be added to give some additional historical perspective. If you look at one of those 80 year charts from Ibbotsons you will see that scv has been the best performing assets class. I think that over long time frames, that is likely to continue. However George's comments almost understate the sentiment to small cap during the late 1990's. It was the death of small caps. They were never going to do well again, ever. This was a prevalent thought.

Since that time you almost need to take off your socks to count the number of years that small cap has been leading.

Where we were then with small cap is where we are now with mega cap stocks, sort of. Quite a few people predicted 2005 would be a year for large cap, ditto 2006 and it is not happening yet. Most of the analysis I have heard about why large cap should do well has not really made sense.

Let me be crystal clear here, at some point large and mega cap will rotate into a market leader and people will wonder, again, if small cap is dead. This cycle will not go away. I do not know when this will happen of course. I own a few mega caps for clients but more importantly I look at cap size of the entire portfolio not the components. My average cap size is in the area of $35 billion, vs. $90-$95 billion for the S&P 500. This is up a little from a year ago.

Usually the maturation of the economic cycle is what drives a rotation into large cap but that has not been the case so far. If you want to be diversified you need some exposure to this part of the market even if you don't expect it to work very well. Being diversified means blending together things that are working and things that are not working. At some point that which is not working will start to work. Most people are unlikely to time these changes very well so by always maintaining diversified exposure good timing becomes less important.

For example I am underweight the financial sector. At some point being overweight will be the right trade. Being wrong with an underweight is a lot better than being wrong with a zero weight.