Small Cap and Value Stocks | Summary and Q&A

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April 1, 2019
by
Ben Felix
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Small Cap and Value Stocks

TL;DR

Market cap weighted index funds may not be enough for successful investing; small-cap and value stocks offer additional opportunities.

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Questions & Answers

Q: Why does the narrator not invest in market cap weighted index funds?

The narrator believes that small-cap and value stocks offer additional opportunities for better returns, which market cap weighted index funds may not fully capture.

Q: What are the differences between value stocks and growth stocks?

Value stocks have lower prices relative to their book value or earnings, while growth stocks have higher prices relative to their book value or earnings.

Q: How do asset pricing models explain differences in stock returns?

Asset pricing models, like the CAPM, include additional risk factors like company size and relative price, which can influence stock returns beyond market beta.

Q: Why are small-cap and value stocks important in investing?

Small-cap and value stocks have historically delivered meaningful risk premiums, and they provide diversification and the potential for higher returns.

Summary & Key Takeaways

  • The narrator admits to not investing his own money in market cap weighted index funds but still advocates for a portfolio of index funds, including small-cap and value stocks.

  • Market cap weighted index funds invest more in large-cap stocks, while value stocks have lower prices relative to their book value/earnings, and small-cap stocks have higher growth potential.

  • Asset pricing models, such as the Capital Asset Pricing Model (CAPM), have evolved to include additional risk factors like size and relative price, which explain a significant portion of differences in returns between portfolios.

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