If you don't know who Josh Brown is, a brief introduction is in
order. He is best known as the author of a blog titled "The
Reformed Broker" and a book titled
Backstage Wall Street: An Insider's Guide to Knowing Who to
Trust, Who to Run From, and How to Maximize Your Investments.
He published that book in 2012 after his brief career as a Wall
Street broker. His friend at the time, Barry Ritholtz, called the
book "a Molotov cocktail thrown at the brokerage industry."
Now they are partners in their RIA launched last autumn, Ritholtz
Wealth Management, where they manage money for and advise high net
worth individuals, corporations, retirement plans, and charitable
But he's not even 40 years old. Even if John Bogle or Art Cashin
were giving you advice about asset allocation and they made a
blanket statement like "avoid small caps entirely," you might raise
an eyebrow. What should we think of this advice from a guy who
started in the business in 2000?
I'll summarize Mr. Brown's logic and two primary talking points
from an interview he did on Yahoo's Breakout with Jeff Macke,
co-author for his new book
Clash of the Financial Pundits
1. Quality small cap research is harder to come by since the 2nd
and 3rd tier investment banks and brokers who used to specialize in
it no longer have the same incentives (market-making and banking
deals primarily) to cover the companies. To quote from the Yahoo
summary beneath the video...
While there's nothing wrong with doing your research and investing
in individual small-caps on your own, for 99% percent of people
Brown says "it's going to be really hard for them to find an edge,
(A) that's enduring, (B) that justifies not just the cost, but the
time spent on this kind of research. For most people there's really
no reason to be going down that rabbit hole."
2. While small caps are viewed as the harbingers and the "advance
guard" of a strengthening economy, Brown says...
"I don't think they're cheap... [and despite that fact that] the
positive benefits of an increasing economy hit their bottom lines
quicker, that's already [priced] in the market."
While he acknowledges that self-directed investors who like to do
research and stock screening can occasionally find gems in the
rough, he wonders how much can you really find out about a company
unless that is your full-time job. In essence, you're always
teetering just one operations revelation or financial restatement
from a 20% drop in the stock.
He says most people don't even do initial stock screening like a
small cap fund manager. Clearly, he's not met very many Zacks
His exact quote that my title is based on was "I would actually
ignore the space entirely."
He goes on to quote the research I shared with you last week from
Michael Batnick, who works for Ritholtz...
35 of the last 36 episodes in the past 14 years where the
Russell 2000 corrected 10% or more, the S&P also followed with
a 10%+ correction.
That's what he's worried small caps are a harbinger for right now.
With the capitulation yesterday of long IWM and UWM positions by
ETF fund manager/timer Good Harbor, he is not alone in being
worried about those stats. Here's the Yahoo link to the
Don't Go Bargain-Hunting in Small Caps
But enough gloom and doom. Let's talk about what we know best:
Are you still an active small cap stock picker and are you changing
strategies at all in this market or macro environment?
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