My best guess is that in Graham's time, there just wasn't much analysis of Small Cap stocks available. I remember that in the 1990's, my broker talked about what a big deal Red Chip Review was when it was started. It was pretty unique in its focus on Small Cap stocks. Most research services as well asJoMoney wrote: ↑Sun May 28, 2023 6:49 pmI don't think professional investors give much credence to 'Efficient Market' theories like "Risk Premiums", but in The Intelligent Investor, when discussing ideas an 'enterprising' (not passive - who he suggested avoid small stocks completely) investor might look at, Benjamin Graham did discuss the "Bargain-Issue Pattern in Secondary Companies" and going over the odd valuation changes from smaller companies at times being relative bargains compared to the larger 'primary' stocks, and sometimes the pendulum swinging to overvalue them.nedsaid wrote: ↑Sun May 28, 2023 6:29 pmSo pretty much, the Small Cap effect existed until the academics published about its existence. To capture the premium, you would have had to know about this before the academics and then found a good fund to capture the premium. Most of us don't have the math skills or the access to data to have discovered this on our own. My best guess is that many professional investors suspected the Small Cap premium existed hence the rollout of these type of funds, an additional problem is that most mutual funds back then and even today come with sales loads. The T Rowe Price fund mentioned above might have had something like an 8 1/2 percent sales load and a 0.25% 12(b)1 fee, which would have taken a chunk of the premium.JoMoney wrote: ↑Sun May 28, 2023 6:05 pmFWIW, I haven't seen it mentioned in this thread, but what's regarded as one of the oldest and highest returning mutual funds is the "T Rowe Price Small-Cap Stock Fund" OTCFX , I don't remember if I first read about it from something Mr. Bogle wrote, or from Jeremy Siegel, but it was one of them.
History on it goes back to mid-1956, over the past 67 years it's had something around 12.6% return annualized.
The "survivorship bias" of looking at that fund, without having other small-cap funds over time to compare to is a bit of an issue though.
Also worth pointing out that from 1982 (the first publication on purported Small-cap effect) to present, the funds return are roughly the same (actually a little less) than Vanguard's 500 fund.
institutional analysts focused on the Large Cap area of the market, there was some research available for the larger Mid-Caps. Way back when, you would have had to do the research yourself and been your own analyst. Thus the Small Cap area of the market would have been more subject to speculation. It was harder to tell what was good and what was junk.