The Market's Secret

Assalamu alaykum everyone. I hope you are doing well. Today is going to be more of an educational life. I'm going to tell you a market secret that perhaps is intuitive, but at the same time, many people don't take advantage of. And I'm also going to tell you, I've teased this for a while, about the new portfolio that I'd like to add to the... PIF portfolios that PIF members have access to. And I'm going to give you the rationale for why I think it's a good idea to add this particular portfolio to the PIF portfolios in this life. So this is going to be really valuable life in Kerala. So do leave a like if you enjoy the live. Thank you so much for all the likes that you have been living on previous lives. I really do appreciate it. And I see them all. So thank you. Without further ado, let's get started. This is not financial advice, so I'll be sure to do your own due diligence before making any investing decisions. So, members know, these are the three portfolios that PIF members have access to. They can see our crypto portfolio, our dividend portfolio, and our growth portfolio. And each one has different objectives. And I think it's time to add a fourth portfolio, which is the type of portfolio. The topic of this life. So there's something... I'm sure you've probably heard some argue that markets are efficient. And that the price of something in the market is the price that it deserves based on the information available at the time. And therefore, many argue that it's very hard to beat the market. That being said, there are anomalies in the market that run against the efficient market hypothesis. And one of those anomalies, perhaps the biggest one, is called the small firm effect. So this anomaly was first found in the study of New York Stock Exchange stocks from 1925 to 1975. It's found that the smallest firms performed the larger firms by around 6% annually, or 0.44% monthly. Put differently, small cap stocks tend to outperform large cap stocks. With the same risk level, by the way. So this study is normalizing for risk. So obviously, so you say, well, obviously small caps perform better because they're a higher risk. But no, here we're normalizing for risk, or which is often measured by volatility or downside volatility. And still, small caps are performing better on a risk adjusted basis. And to quantify this advantage for small cap stocks, if you look at the average return between 1926 and 2018, for example, the average return was north of 16%. Whereas for large cap stocks, it was less than 12%. On a compounded basis, the differences around 2% every year, small caps versus large caps. What does that mean in terms of numbers? A hypothetical $1 investment in the S&P made at the beginning of 1926 and held till 2016, for example, would be $6,035 in 2016. A similar hypothetical $1 investment made in the portfolio, small cap stocks would have grown to 33,212. So that's over a fivefold return over this period, 5x the amount of return over this period. So this is a non-trivial difference. This is certainly statistically significant. And not only this, but there are also diversification benefits for combining small caps with large cap portfolios. So the correlation between small caps and large caps is less than one. So a correlation of one means that these two assets are correlated, therefore adding both of them to a portfolio, mixing them in a portfolio would not really increase the diversification of that portfolio. But because they're less than one, the correlation between them, this means that they don't always move in the same direction. And because they don't move in the same direction and they're not perfectly correlated, there is some diversification benefit to it. So it lowers the overall risk of your portfolio if you have a mix of large cap and small cap stocks. So the advantages of investing in small cap and micro caps would be obviously the high growth potential, right? So a $200 million company adding $200 million in value would double the size of the company, whereas a $10 billion company adding $200 million would not really be that big of a return. Diversification, as we mentioned, low correlation with large cap stocks. So if you're mixing small caps and large caps, you get diversification there, even if you're still only restricting your investing to equities. You have the potential for acquisition. This is quite a common catalyst for successful smaller cap companies. If they're working on something exciting and the business makes sense, then a larger cap company will just buy them out. And typically that creates a windfall for investors. And you get access to undervalued stocks when you're investing in smaller cap and micro cap stocks. Why are they undervalued? Well, because they're less covered. There are less analysts researching these names on average because they're smaller, therefore there's less interest in them. And then also the larger firms, investment firms, don't really bother with these smaller cap stocks. And so incorrectly. So, for example, if you have a fund that manages $10 billion, it's not going to be interested in buying a $50 million stock, even if that stock does a 10x. It's only going to show up as less than 5% for it in terms of return. Now there are risks for smaller and micro cap stocks. So there's obviously a lack of liquidity. So the difference in between the bid and ask is typically wider. There's higher volatility. A smaller boat is moved by larger waves by a greater amount than larger boats are. Greater risk of bankruptcy. So these smaller companies, if they could get crushed by a bigger competitor, by market forces, a lot easier than a larger company can. Often there are more lax reporting requirements for these smaller companies. And there's concentration risk because a lot of times these companies will have one line of business. And that's basically what they're betting on, that this line of business is going to work out. However, larger companies like Google, for example, they have hundreds of different small bets that they're making. One of them may flop and even 10 of them may flop and they'll still be okay. This is not the case with small cap and micro cap stocks. And I think now may be a good time to exert some effort into researching these small and micro cap stocks. Because recently, even though historically, if we look over the last almost 100 years, they've outperformed by a material, by a material amount compared to large cap stocks. In recent years, they haven't really performed that well and they've underperformed the S&P. If you look at the Russell micro cap index, for example, it underperformed the S&P over the last few years. And the reason is because small cap stocks are more sensitive to interest rates. They typically require financing. They typically, if things get more expensive on their financing, money gets more expensive for them. This is going to eat into their bottom line a lot more than it would for a larger company. So you can see that the total debt to total assets for smaller cap companies has been rising recently, whereas it has been falling for larger cap companies. And the quarterly earnings growth has suffered 40 smaller caps. Again, because the money that they need is becoming more expensive, that's eating into their earnings at a much greater rate than it would for a larger company. So things have been tough for smaller cap companies. And as I always like to say, a good starting point for any successful investing endeavor is to ask yourself, what is out of favor at this particular moment in time? And small caps have been out of favor for the last few years. So I think their time is coming up. And especially in light of where we are in the liquidity cycle. So we are, I believe, closer to the trough in the four-year liquidity cycle than we are to the peak. And I think we'll probably peak late 2025. So I think we are approached, or maybe even early 2026. So I think we're approaching a pretty strong uptick in liquidity globally that is motivated by less restrictive monetary policy. And this should bode really well for these smaller companies. So to summarize the rationale for making a PIF small cap portfolio, by small cap here I'm talking about sub 500 million. The microcap segment of US equities market is very small, right? So approximately $309 billion and microcap stocks are available for the investing public, $309 billion. That's basically 35% of the market value of Apple. Less analyst coverage. Actually, I'm sorry, it's less than that. And less analyst coverage, as we mentioned, leads to under valuation. High management ownership that small caps enjoy leads to better alignment with investors. Now, this is something that perhaps not many people know is that one-third of shares for smaller caps, are typically held by management. So that means management has a really strong incentive to maximize the value of these shares. And that aligns their incentives with the incentives of shareholders. And this incentive is often misaligned with larger cap companies, where in typically only a small percentage, less than 5% of the companies owned by management. Now, over the past few years, as I mentioned, S&P has outperformed their also microcap index. Small cap stocks have outperformed large cap stocks if we zoom out by an average of 2.5% per year over the past 90 years. The smallest 10% of stocks in the US market have outperformed the largest 10% of stocks by an average of 4.4% per year over the same period. And, as I mentioned, microcap stocks are often attractive targets for acquisition, and that creates a catalyst that these larger cap companies don't really have, and can be a windfall for investors. And that's why, in fact, we will be creating a small cap or microcap portfolio for investors to follow. I believe we can find some diamonds in the rough. I have some short list of some names that will be taking a closer look into over the coming few weeks. So if you'd like to follow our portfolios, including the small cap and microcap portfolio, then consider becoming a member, link to do so is in the description. If not, I hope you at least benefited from the information in this slide, because I believe it could prove to be quite profitable for you if you understand it, take it to heart and act on it in an intelligent way. Like I said, there are advantages to small cap, microcap stocks if you know what you're doing. It can also burn you if you don't. So something to be aware of. Right now, let's take some questions while it comes to them. Try to avoid biotech just because of the buyouts, but it's upside can be huge. Yes, this is true. And, you know, actually, I went to my brothers, I saw my brother over the weekend, and he was mentioning that some like a doctor that he knows had invested in this biotech company and it did really well. And he ended up basically retiring. Now he just works part time. So if you know what to invest in, you have a unique insight into a particular company. It's within your circle of competence, as we always like to say. Then, you know, investing can, you can really do well for yourself. And especially if there's smaller companies, if there's smaller cap, microcap companies, it's not unheard of for a company like this to do a 20 to 100x even. There are obviously a lot of companies that go bankrupt, but if you're able to find one of them that does 50x or 100x, then that should make up for all the losers that you have. Thank you so much. It says your lives will always make my day. I appreciate that. I appreciate you coming in here. Obviously it makes the lives better to have an active audience. Do you think we will have a significant dip in BTC price? So I try to shy away from making near-term predictions, but honestly, I don't think so. I think that probably the selling from anticipated from Mt. Gox liquidations are overestimated, the selling pressure that will come from that. I think the panic and anticipation of that was more than, I think, sufficient. And I think that as the price goes down, the selling pressure goes down as well, because as we distance ourselves from the highs, then coin holders will be less incentivized to sell, because after all, we've already seen 70,000. So why am I going to sell? Unless I need the money, why am I going to sell at 60? I've already seen that it can raise 70. So if I just wait on it, then the difference is 10,000 per coin that I have. So I think that, and especially if we get a good print on inflation, showing inflation going down, and so far, all of the data that we've gotten this week with regards to the economy is showing a slowdown. So logically, inflation print should follow with a cooler inflation print. And I think that should incentivize the bed to become more dovish in the language that it uses, and that will incentivize the market to be more bullish with regards to the liquidity picture. And as I mentioned, that's really the most important metric for the markets is how much cash they're slashing around. And so that will be definitely a bullish thing. So before these reasons, I'm not really concerned about BTC's price. I mean, could we see the 50s again? I mean, we're very close to that right now. We're 61.5. So of course we could. But is it something that's concerning me? No, because I think that two to three weeks from now will be in a very different state in the markets. That's my prediction. Obviously, I have a lajo alum, but I think two to three weeks from now, we could be looking at a very different sentiment towards crypto and risk assets. I am a total general still in investments to matters and make stuff. And to make stuff easy, I am doing the 50, 30, 20 strategy thoughts. So are you talking about like needs versus wants versus investing? That's your, that's what this is referring to. So I guess 50% on needs and your budget, 30% on wants and 20% investing. Obviously the percentages here will differ like how much you budget for each one of these categories differs based on how much you have already invested where you are in life. How much you're earning versus how much you really need. If there's room to cut back, let's say you're single and you're making $250,000 a year. Well, at which point I would say, well, this is not going to last for long. Let me take full advantage of this. So maybe I do 20, 20 and 60 where I'm investing 60% of every dollar I make because this is not going to last. Let me take advantage of this. So it does differ based on your situation. What I can say, I'm cash if nice to see you. I think so cash is asking is it a good idea to buy VTC or should we wait more? I think dollar cost averaging is a good idea. And it's objectively a better time to buy. So I went over this in my last last live. So if you look at the market sentiment right now, we're now in neutral territory, actually approaching bearish territory. Now is the time you should think about buying. And again, not financial list. This is how I think about it. Hey, welcome Sam. I'm not going to see you. What are your thoughts on adcore is the upside worth it at the current price. Adcore is something where is a company where I'll be looking at its next earnings very closely. Now, notice there are other companies in the space that have taken a beating. So they're not alone in this. So we'll have to we'll have to see how their how their next earnings report is and their guidance. So now it's kind of a wait and see what you are coming. Thank you all for coming in and tuning in do leave a like on your way out. If you learned something, I'd really appreciate that. Until next time, make sure to take care of yourself. Assalamu alaikum and peace be upon you all.