As we write (around 2:57 p.m. ET), stocks are taking a beating.
That makes our talk of switching out of large-cap stocks timely.
So, with that in mind, let’s take our analysis of the “10×10 Approach” and small-caps to the next level.
We’ll share more insights below and help you figure out how to keep playing this unpredictable market.
But first, we’ll check in on today’s market action…
Market Data
The S&P 500 closed down 0.7% to end the day at 5,117.09… the NASDAQ dropped 1% to close at 15,973.17.
In commodities, West Texas Intermediate crude oil trades at $81.01, down eight cents…
Gold is $2,160 per troy ounce, down $7 from yesterday…
And bitcoin is $68,605, down $1,144 since yesterday.
And now, back to our story…
The Next Nothing
Over the past couple of weeks, we’ve introduced you to the “10×10 Approach.” It’s a way of investing developed by legendary investor Doug Casey.
We’ve explained how it works, how it can help you decrease risks, and how it can help you profit from a rising market without having too much exposure.
And yesterday we showed you exactly how that can work… And how a portfolio of 10 small-cap stocks can outperform a portfolio of 10 large-cap stocks by almost 10-to-1.
And that’s all well and good.
But where do you start? And does this strategy guarantee that you’ll beat the large caps?
We’ll go some way to answering both questions today.
Let’s take the second question first. The answer is… no. This strategy won’t guarantee you’ll beat large-cap stock performance. But that doesn’t negate our position.
It’s a simple fact that over the past five years, large caps have outperformed small-cap stocks all the way.
Our point is we figure a “big switch” is underway and will build gradually over the next few months. That will be when investors begin to switch from large caps to small caps.
But there are no guarantees.
As for where you start, we’ll delve into that next week. But today, we want to tell you where not to start.
One of the most overused and useless claims made in financial publishing is that a particular stock pick is the “next Amazon,” or the “next Nvidia,” or the “next Microsoft.”
Mostly, those claims are hogwash.
Not just because that’s the wrong way to look at investing in small caps… The reason it’s hogwash is easy to figure.
Think about those three big companies we’ve just mentioned: Amazon, Nvidia, and Microsoft.
Now, take yourself back in time. Let’s just say to 1981. If someone had told you to buy Microsoft back then, how would they have described it? Would they have said, “Microsoft is the next…” The next what?
The next Xerox? The next IBM?
What about Amazon? Let’s go back to 1995. How would they have described Amazon back then? The “next Walmart,” the “next Target,” maybe the “next Sears?”
We don’t think so.
We think you probably get the point. Looking for the “next” something is entirely the wrong way of thinking about small caps.
Instead, you need to think about small caps in two ways and two ways only.
First, don’t think of a stock as being “the next” something or other. Think of it as an innovator or an improver. Think of how the company you’re researching can innovate or improve on an existing idea.
Or that it has a new way to do something… a new way to (this is probably the most important thing) solve a problem faced by individuals or businesses.
Second, look for companies playing a supporting role in a current or forecast trend. Here you often hear folks talk about “picks and shovels” plays.
That’s a nod to the idea that it’s not just the mining companies that make money from mining commodities. There are all the supporting businesses and suppliers that help make that mining happen.
In short, don’t get distracted or caught up in the idea that a tiny $50 million stock is going to be the “next Microsoft” or the “next Amazon.”
Of course, that could happen… but it’s not likely. Big companies have gotten to where they are because they too innovated or improved. Microsoft wasn’t the next anything… neither was Amazon… and neither is Nvidia.
They are their own companies with their own ideas and specialties.
We’ll be back next week where we’ll continue to delve even deeper into the investing world of small-cap stocks.
More Markets
Today’s top gaining ETFs…
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iShares MSCI Peru ETF (EPU) +2.1%
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Amplify Transformational Data Sharing ETF (BLOK) +1.7%
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WisdomTree Japan Hedged Equity Fund (DXJ) +1.5%
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Franklin FTSE Japan Hedged ETF (FLJH) +1.4%
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WisdomTree Japan Hedged SmallCap Equity Fund (DXJS) +1.4%
Today’s biggest losing ETFs…
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ProShares Ultra QQQ (QLD) -2.4%
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First Trust Technology AlphaDEX Fund (FXL) -1.7%
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iShares U.S. Technology ETF (IYW) -1.5%
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Technology Select Sector SPDR Fund (XLK) -1.5%
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iShares Global Tech ETF (IXN) -1.5%
Cheers,
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Kris Sayce
Editor, The Daily Cut