The vast majority of investors regret not having bought Wal-Mart (NYSE: WMT) or Microsoft (Nasdaq: MSFT) 20 years ago, long before they became the behemoths they are today. Consider this, though: Many investors in 20 years from now will probably look back at the opportunities available in today's market with a similar sense of regret.
Without a doubt, the giants of tomorrow are out there right now -- and there is still time to act.
Of course, finding future leaders is never easy. In all likelihood, the companies that will deliver the biggest gains over the next 20 years are probably quite small today.
This is because stock prices are a derivative of earnings growth. It stands to reason that a small company with $10 million in earnings can double or triple that figure far quicker and easier than a corporate giant with $10 billion in earnings -- richly rewarding its shareholders in the process.
During the past 10 years, small-cap companies have outpaced their large-cap counterparts. In fact, the Russell 2000 Index has delivered an impressive +46.6% more than the S&P 500.
Meanwhile, over the same time frame, value stocks have soundly outperformed growth stocks.
At the confluence of those trends, the small-cap value sector has been one of the single best performing asset classes.
Of course, markets are cyclical, and anything can happen over short periods of time. Therefore, long-term performance figures tend to have far more predictive power.
On that front, small-cap value stocks still look superior . . .
|1969-2002 Annual Returns||Value Stocks||Growth Stocks|
As the table shows, small-cap value stocks averaged +14.8% annual clip during the 33 year period, according to a recent study. Yet during the same time period, large-cap value stocks averaged only a +10.8% annual gain.
Over the long haul, that difference can add up to a substantial amount of money.
|Growth of $10,000||10 Years||20 Years||30 Years||40 Years|
|Large-Cap Value (+10.8%/year)||$27,886||$77,766||$216,866||$604,770|
|Small-Cap Value (+14.8%/year)||$39,757||$158,065||$628,429||$2,498,477|
Based on the 20-year time period shown above, investors in small-cap value stocks would have earned an additional $80,299 when compared to investors who placed their money in large-cap value stocks. And over an 40-year time period, that figure jumps to $1,893,707 in additional returns!
It seems pretty clear: if you want to maximize returns over the long haul, then you need to have exposure to small-cap value stocks.