Jrinne = ~“What’s my liquidity?” = All my sims/ports require at least $100mm market cap and $5 price minimum, but I’m showing my age here, because this use to be the minimum definition of small cap… perhaps I need to move it up, but a lot of what I see, at least where people are “competing for show”, is minimums of >$1 and >$50mm. I originally considered $500,000 ADT sufficient, but had to move it up as well as create formulas to account for 1-time spikes in volume. This improved liquidity but my slippage is still higher than expected (something not only the study I cite mentions but also the study Tomyani cites).
Mgerstein = “Not sure where you’re getting this.” = Research Affiliates is Rob Arnott’s firm and if you don’t know him, then you and I may have been “in the business” during the same period, but it was different businesses (fwiw: I’ve been on the buy-side my whole career, until I retired in 2004).
Tomyami = I saw both Rob Arnott (~”my” study) and Aswath Damodaran (“your” study) at the same quant conference in NY years ago and they were the two people that impressed me the most (besides Peter Bernstein, who did not present but was there in a “Chairman Emeritus” role). And Aswath’s study, at least to me, supports the questionability of small cap performance.
Aurelaulel = your 2nd truth contradicts your 1st truth (if everything that is rare is expensive, there can be no rare, inexpensive HMOs). And from my meager education in logic, it is my understanding it works more like the scientific method in that it does NOT prove anything per se, rather it disproves “the null hypothesis”, leaving you to ASS-U-ME your hypothesis is (or may be) correct. That’s why I am devoted to the logic-loving (libertarian) view of the Austrian school of economics (I don’t believe anything in economics can be proven, only logically deduced), and most importantly Schumpeter, who emphasized entrepreneurship and innovation (forte’ of small business, aka small-caps), and especially Schumpeter’s belief that he could be “proven” wrong because, after all, things change (constantly, and change was central to his belief that economic systems were “organic”, not static).
“Edit” PS: Schumpeter, IMHO, is being proven more and more right every passing day (unfortunately).
And to all, I posted this here as “food for thought”, but I feel like Ben Bernanke at a goldbug conference. I’m relatively new to P123, but I’ve known quant before it was quant, and there are cycles to all models. It just happens I joined P123 near a top (perhaps), and currently my results do not show the results that long-term testing show. However, that is exactly a point made by Damodaran, who shows a slide that it takes, what, 15-20 years for small-cap outperformance to “be definitive”. For those of you who don’t understand what impact this has, I would urge you to read an instablog I wrote on Seeking Alpha, just google “What’s Your Decade, Man?”.
Finally, everyone should take note of my last sentence in the original post, which I feel most have missed: “…small-cap out-performance… can best be realized by using rules-based value and momentum strategies.” I don’t know about the rest of you, but that’s why I’m here!
Fips = I’d need to find a free copy and the time to study the study you cite, but the article/study I cite does point out there are a lot of flawed small-cap studies out there. And I know Arnott and Damodaran (by reputation).