Copyright ©1996, ProMotion, inc.
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This is a no-nonsense guide to making money.
It's for long-term investors, not speculators, people who want to beat inflation but aren't willing to stake their life's savings on the slim chance of making a killing. And the best way I know to achieve superior returns with reasonable risk is to put part of your savings into stocks having small market capitalizations -- companies like the Scotts Co. and Vans, Inc., whose issued shares have market values that are dwarfed by those of IBM and Microsoft.
You probably already know that in the long run, stocks beat out investments like bonds and money markets. You may also have heard that small stocks trounce larger ones. If not, here are a few stats to convince you: According to a study by Chicago-based consultants Ibbotson Associates (whose findings are summarized in the charts on pages 4 through 7), stocks outperformed bonds in every one of the 20-year periods from 1926 to 1995, and in 94 percent of those periods, the smallest stocks did better than larger ones. Twenty years is probably a suitable investment horizon for most working people. But even if you're retired and most of your biggest bills lie behind you, you may well need to keep your savings growing for another 10 years or more. So you should know that Ibbotson also concluded that stocks beat out bonds in 86 percent of the 10-year periods between 1926 and 1995, and the smallest stocks outshone all other investments in 60 percent of those periods.
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"Stocks beat out investments like bonds and money markets . . . small stocks trounce larger ones." |
Investors in U.S. Treasury bills, notes, and bonds may barely beat inflation, but they know if they hold on to their securities till maturity, they'll get their principal back; equity investors can lose their shirts. In addition, the small-cap performance figures quoted above have been averaged over a 70-year period, a process that smooths out some heavy-duty price volatility and variability. During certain months, years, even decades, the small-stock group lagged giants like Intel Corp. and Nike. And for the entire period, the triple-digit growth of a few stars pulled up a large number of stocks that went nowhere or failed altogether. Small companies, which often have only a few products and limited reserves against hard times, are particularly vulnerable to recessions, rising interest rates, or the loss of key executives; it takes only a few spooked investors to send their sparsely traded shares down the tube.
In short, small stocks are risky. Pick the wrong one or the wrong time to buy it, and you can kiss part of your nest egg goodbye. "Certainly in any study that you ever read about how small caps have performed, you are going to see that you get that extra return," says Prudential Securities director of small-cap research Claudia Mott. "But it doesn't come without a lot of added risk. And, certainly, the smaller you get in size, the worse the risk tends to get."
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"Small stocks are risky. Pick the wrong one or the wrong time to buy it, and you can kiss part of your nest egg good-bye." |
In the following chapters my coauthor, Elizabeth Ungar, and I will explain how to incorporate the high performance of small stocks into your portfolio without high anxiety. The exact method you choose will depend on what kind of investor you are. You might feel most comfortable, for example, leaving the detailed decisions to a professional. In that case, you would probably do all your small-cap investing through mutual funds. A good fund manager can earn you returns of 15 percent a year. That's after expenses, which can be steep -- usually about 1 to 2 percent of the assets you invest. But doing it right yourself isn't cheap, either: One percent of a $100,000 investment is $1,000, which disappears pretty fast when you start buying a souped-up computer and subscribing to a few periodicals. And that doesn't count the time you need to spend.
On the other hand, you might be someone who likes to take matters into your own hands. You should still probably put a large part of your small-cap portfolio into funds. But you might want to devote a small portion to individual stocks, picking and following these yourself or with the help of a broker specializing in the small-cap market.
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"Information, advice, and strategies -- all of it supplied by experts in the field." |
Each chapter builds on the previous ones. The opening chapter lays the groundwork, presenting definitions and discussions of basic terms and concepts. Chapter 2 addresses mutual funds and how to use them in your small-cap investing. The third discusses how to create and care for a portfolio of small stocks; Chapter 4 presents some strategies to use in picking and weeding out your investments. Finally, following these chapters are an appendix, listing small-cap companies alphabetically and broken down by state, and a "Resources" section, containing the names and phone numbers of regional brokerages as well as sources for further reading and research.
The book is written for a range of readers, from relative market novices to those who, though not professionals, have experience with stocks and perhaps have dabbled in derivatives. Sophisticated investors may want to skip the introductory material and concentrate on the strategies section. Less experienced ones should probably start at the beginning, to ensure they have the background they need at each stage to apply the recommendations and schemes described. They may then decide to stop at the funds chapter but later dip in again to learn more about investing in individual small stocks.
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"The book is written for a range of readers . . . The one ground rule is to enjoy yourself." |
C H R I S T O P H E R G R A J A
Copyright ©1996, ProMotion, inc.
www@bookpage.com