Let’s get more specific.
Over the past week (and longer) we’ve shared our broader “10×10 Approach” strategy.
We’ve explained what it is and how to use it.
We’ve explained how you can use it… not just as a way to help you grow your wealth, but to help you reduce your risk.
Today, we’ll go one step further and show you why we like this approach – and one specific asset class – so much.
More below. First, we’ll check in on today’s market action…
Market Data
The S&P 500 closed down 0.3% to end the day at 5,150.48… the NASDAQ also dropped 0.3% to close at 16,128.53.
In commodities, West Texas Intermediate crude oil trades at $81.09, up $1.46…
Gold is $2,167 per troy ounce, down $10 from yesterday…
And bitcoin is $69,749, down $3,540 since yesterday.
And now, back to our story…
10 of the Best
To get up to speed on where we are with our 10×10 Approach series, check out the essays from earlier this week here, here, and here.
And here’s our essay from three weeks ago, where we introduced the idea.
Armed with all that information, today we’ll show you how powerful this approach can be… especially when used with our favorite “asset class” – small-cap stocks.
But before we get to that, let’s see how the top 10 stocks by market capitalization performed over the past six months:
Data Source: Bloomberg
That’s not a terrible return. An average gain of 30%. The best performer – not surprisingly – is Nvidia (NVDA) with a 99% gain.
The worst performer is Apple (AAPL) with a -2% loss.
Our view is that the best returns for large-cap stocks could be behind us. That doesn’t mean large-cap stocks will crash… or even that they’ll go down.
Just that small-cap stocks will perform better than large-caps during what we believe is the late stage of the current bull market cycle.
And that outperformance is already happening.
To show you what we mean, here’s a list of the top 10 best-performing stocks of the past six months. Here we’ve excluded a bunch of penny stocks… those trading less than a dollar per share.
And we’ve set a minimum market cap of $100 million. Oh, and these are all U.S. stocks, and we’ve excluded exchange-traded funds (ETFs).
Other than that, with no other exclusions, these are the best-performing stocks over the past six months:
Data Source: Bloomberg
The outperformance is pretty clear.
A couple of things to note. Of those 10 stocks, nine of them are below $2 billion in market capitalization. Eight of them have a market cap below $700 million.
The largest stock on this list is one you may be familiar with, that’s Microstrategy (MSTR), the company that became well-known several years ago for investing a large amount of its capital in Bitcoin.
So it’s no surprise it has done well as the Bitcoin price has hit a new high.
But aside from that, the rest of the stocks are genuine small caps. And what’s more, you can see the kinds of gains possible in relatively short periods.
Remember, these returns are over the past six months only.
This is what makes small-cap stocks perfect for the 10×10 Approach. Because here’s the best thing, which ties into yesterday’s essay on using this strategy to reduce your overall market risk.
Think about it this way. To make meaningful returns on a 30% average gain in a stock, you need to make a meaningful investment. To make a $3,000 profit, you need to invest $10,000 in the stock.
Is that something you’re comfortable doing in what could be the late stage of the bull market? What if it’s the late-late stage… meaning we’re in for a sustained stock sell-off?
(Editor’s note: Again, our view is we’re not yet at the late-late stage… but what if we’re wrong?)
Now compare that to cutting back your large-cap growth exposure… allocating most of that growth exposure to safer dividend-paying stocks… and then shifting a small amount of the remaining capital into small-caps as part of the 10×10 Approach.
In this case, let’s say your goal is still to make a $3,000 profit, if you back the right small cap (obviously, it has to be the right one!), you don’t need to put down $10,000…
Using our example above of 500% average gains for the best performers, a stake of just $600 in the right stock, would have returned the same $3,000 gain.
Let’s say you don’t pick the best stocks. Let’s say your average returns are only 300%. In that case, an increased stake to just $1,000 and a 300% gain gives you the same $3,000 profit.
Now look, we’re simplifying this. And we’re not saying you should expect to regularly clock 300% or 500% gains from small caps. But it is possible to pick up big gains.
Of course, given the greater risk, you must expect to take losers too. That’s where your risk management strategy comes in. The first part of that risk management strategy involves making smaller bets than you normally would if you invested in a large-cap stock.
The second part is to make sure you use a stop-loss strategy… yes, even with small caps. Failure to use stop losses is just plain dumb. There’s no other way to explain it.
The stop-loss strategy you use is up to you. But we would suggest setting something between 25% and 50% depending on the position. You can also use technical analysis to help guide you.
So, that’s how it all works. Tomorrow, we’ll share some of the sectors that we believe are ripe for you to begin trying the 10×10 Approach for yourself.
Tune in then.
More Markets
Today’s top gaining ETFs…
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Fidelity MSCI Energy Index ETF (FENY) +1.1%
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Energy Select Sector SPDR Fund (XLE) +1.1%
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iShares MSCI Global Energy Producers ETF (FILL) +1%
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Vanguard Energy Index Fund ETF Shares (VDE) +1%
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iShares U.S. Energy ETF (IYE) +0.9%
Today’s biggest losing ETFs…
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Siren Nasdaq NexGen Economy ETF (BLCN) -3.6%
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Invesco Dorsey Wright Healthcare Momentum ETF (PTH) -3.3%
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iShares U.S. Home Construction ETF (ITB) -3.1%
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Amplify Transformational Data Sharing ETF (BLOK) -3%
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KraneShares MSCI China Clean Technology ETF (KGRN) -2.9%
Cheers,
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Kris Sayce
Editor, The Daily Cut