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Published: November 1, 2010
In 1973-74, stocks fell in half, peak-to-trough. At the
time, it was the worst stock market bust since the Great
Depression.
The 1973-74 bust has a lot in common with today's bust.
So what worked in investing after the bust back then? One area
of the stock market soared 20-fold back then... and right now,
it's completely ignored.
Today, I'm going to show you what that is and a few ways to buy
it. But first, let's take a quick look back at 1973-74...
Back then, we hit a long recession - just two months shorter
than the current one. Stock prices dropped in half back then,
just like in today's Great Recession. The dollar was crashing,
having just come off the gold standard. The price of gold soared
threefold in 1973-74. And commodity prices nearly doubled.
What happened next? What happened starting in 1975 as we exited
the recession?
You'd be surprised...
Gold crashed nearly in half, bottoming out in mid-1976 near $100
an ounce. Commodity prices had their worst performance of the
1970s, also. After a nice bounce in stocks in 1975 (similar to
the bounce we got in stocks starting in March 2009), the stock
market went nowhere for the rest of the 1970s.
So stocks, gold, and commodities all did nothing, at best. But
there is one little-mentioned segment of the stock market that
went absolutely nuts...
That segment was smaller companies.
If you had invested $10,000 in stocks ranging in size from $25
million to $100 million, it would have turned into over
$100,000. If you had chosen even smaller stocks - under $25
million in market cap - $10,000 invested would have turned into
over $192,000. Said another way...
You'd have made 20 times your money in a basket of the smallest
microcap stocks, coming out of the 1970s recession.
And it turns out, this wasn't an isolated incident...
I looked at every recession going back to 1950 (as far back as I
have data on smaller stocks). If you'd bought small stocks
during the year the recession ended and held for three years,
you'd typically have made a 91% gain.
Coming out of nine recessions, you never would have lost money.
Your biggest gain, as you might think, was coming out of the
worst bust. That was a 167% gain after the 1973-74 bust.
The last recession before the most recent one was mild, and it
ended in 2001. But still, tiny stocks soared... A basket of
small stocks returned 120% for the three years from the start of
2001 through the end of 2003. In that same time, the S&P 500
fell 12% and the Nasdaq lost 18%.
The message is crystal clear... after a bad recession, you want
to own small stocks - the smaller, the better.
So where are we? We know microcaps soar after recessions. We
know the tiniest ones can do ridiculous things - like go up
20-fold in eight years after the 1973-74 bust.
But so far, after the Great Recession, microcap stocks haven't
exploded - yet. They've done fine, just nothing exceptional.
Since the start of 2009, a basket of small stocks has performed
in line with the S&P 500 and has underperformed the Nasdaq. The
total return is around 30%.
Microcaps have a history of strong outperformance after
recessions. Just under triple-digit gains are the norm, over a
three-year holding period. So you haven't missed anything yet.
To spread your risk across a basket of microcaps, you have a
handful of microcap funds to choose from, including the
PowerShares Zacks MicroCap Fund (NYSE: PZI), the First
Trust Dow Jones Select MicroCap Fund (NYSE: FDM), and the
iShares Russell Microcap Index Fund (NYSE: IWC).
The story is simple... When a recession is near its end, you
want to own small stocks. The easiest way to do it is through
one of these funds.
--Steve Sjuggerud
Editor
Daily Wealth
Note: This article originally appeared on
Daily Wealth |
