Today's Outside the Box is by James Montier of Dresdner Kleinwort. Quite frankly, the research that James discusses surprised me. In his article "Meaty beaty big and bouncy," James dispels what he calls an urban myth that small caps tend to outperform large caps. If you disentangle the size and value effects the difference goes away! James goes on to say that even if you still believe in small cap investing, the fact that small caps are trading at a premium to large caps looks insane to him.
James is a highly intelligent analyst as well as a good friend of mine. He always provides a great perspective on the markets with his thought provoking research. For those of you unfamiliar with James and his firm Dresdner Kleinwort, they are a global investment bank with headquarters in London and Frankfurt.
Just as I have found James' conclusions to be fascinating, so I believe that many of you will find his analysis to be "outside the box" regarding portfolio allocation amongst market capitalizations. And for those wondering, the title of the article is from the name of a compilation album of the rock group "Who's" greatest hits.
John Mauldin, Editor
Outside the Box
Meaty Beaty Big and Bouncy
No, not a description of my stomach... although thinking about it, it could be. Nor does it purely reflect my love of The Who. Rather the chosen title is meant to reflect upon the opportunity created by recent performance of small caps. But before dealing with the tactical outlook for small caps, I want to examine the strategic arguments used for small cap investing.