Month: January 2004

Year of the Small Cap

It is January, and that means a parade of financial experts giving their personal opinions — I mean predictions — regarding the new year.

Almost inevitably, one will say that this will be a year where small cap stocks outperform the big ones: that buying stock in relaticely small companies will make you more money than a nice, diversified S&P 500 or Dow 30 index fund. I have listened to this claptrap for a half dozen years now. Here is why it is still wrong.

First, investing in small cap stocks is a dicey game of cat and mouse for small investors. Doing it sucessfully depends on finding a small company that is publicly traded, and hoping some fund manager finds it and buys large quantities of it later, driving up the value of the shares. Oh yes, it also depends on your finding this needle in a haystack without being played by some pump and dump scammer, who tells you that XYZ Corp is the up and coming thing shortly after buying it himself, and sells it shortly after enough foolish people buy it so as to drive up the price.

The second flaw in the “year of the small cap” theory is the chart they will toss up in their defense. It will be a chart of a stock index called the Russell 2000. Russell takes the 3000 biggest cap companies, calls the top thousand a big cap index, and the lower 2000 a small cap index. The first problem with this is that there are over 6000 publicly traded companies, meaning there are 3000 companies smaller than any of those in the Russell 2000.

But wait, there’s another problem with the Russell 2000, and it has to do with being the bottom 2000 of the top 3000. There are two separate schools of stock market thought that say nothing more than Newton’s first law of motion: things tend to keep going the way they are going. Both Momentum Traders and Technical Analysis adherents will tell you that stocks going up are likely to keep going up, and stocks going down are likely to keep going down, although they differ substantially on the details.

Stocks in the Russell 2000 that do well gain market cap, and graduate to the Russell 1000. On the other hand, stocks in the Russell 1000 that do poorly drop in market cap and end up in the Russell 2000. If I were designing an index to decline, it would look a lot like this. It might well go up short term, as it did in 2003, but do not get to thinking the Russell 2000 is a long term investment.

Remind me to republish this post next January.

Happy New Year

Judging from the large display of exercise gear at the front of Target, it is a safe guess that weight loss is on the New Years Resolution list of many people. Never mind the sweaters being clearanced to make room for shorts and sleeveless shirts. In January.

Before I go any further, I would like to say that about 5 years ago I lost about 30 pounds, bringing myself well into the normal BMI range, and I have stayed there. I am not one of those skinny cheerleader types who has never had to lose more than 2 pounds. Nor am I one of those people who talks about what you should do, while consuming a gallon of ice cream, a six pack of beer, and a pack of cigarettes. This does not make me an expert, but I’ve been there.

There are several important truths I have learned about weight loss. The most important of these is: Every diet that works requires drastic reduction or complete elimination of refined sugar. What? You didn’t think Dean Ornish and the rest of the low-fat crowd meant that you could drop pounds by switching from Snickers to Twizzlers, did you? I am not telling you that Atkins is the way to go, although low-carb is how I did it. I am telling you that sugar is a bigger enemy than fat. Even the USDA says “Some dietary fat is needed for good health.”

The second great diet truth is: Diet foods are for the most part a waste of time and money. Low fat or low carb, the number of items I have found that defy this rule can be counted on my fingers, despite the fact that diet foods are an almost $6 Billion industry. I believe the effectiveness of the low-fat diet is inversely related to the marketing of reduced fat foods. Think about it: 20 years ago we didn’t have fat-free cookies or low-fat mayo; the only dairy products on a low-fat diet were skim milk and some varieties of yogurt — oh, and some really nasty margarine; eating low-fat meant lots of fruits and veggies, with some lean meat. Yeah, you could eat bread or a baked potato, but what would you put on it? If my theory holds true, low-carb diets will become less effective as more ersatz bread and other sugar alcohols sweetened products become available and more dieters use them as a crutch.

Another diet truth is that Calories do matter. Counting grams of this or that is usually a proxy for calories. I personally find that a read of the nutrition panel can talk me out of consuming most things I shouldn’t. Oh, and don’t forget to figure out how many servings are in the container, or how much you are likely to consume at one time.

All the experts say you can’t lose weight and keep it off without exercise, right? Alright, then here is a truth and a half about exercise: Exercise is not fun, and sports are not exercise. Ooooh did I say something unpopular? Even professional athletes have to work out. If pros don’t get enough exercise playing their respective sports, what makes you think you are getting a workout on the sporting field? Furthermore, if you exercise for fun, you will be demotivated when it stops being fun. If you exercise because of the way you look (or want to look), all you have to do is look in a mirror to be motivated. Oh yeah, and don’t think that a good workout means you deserve a treat.

The final diet truth is the heaviest of them all: Your current weight is the result of your current diet. You can lose lots of weight, but if you return to the way of eating that made you fat in the first place you will gain it all back. If you seriously think you have some medical problem which causes you to gain weight or inhibits your ability to lose weight, stop griping about it and see a doctor.

You don’t need spandex to lose weight unless that motivates you somehow. But you might want to wait on the shorts until spring; chances are they will be on clearance by the time it’s warm enough to wear them.