Large vs. Small Company Growth

Mar 2018

Suppose, for example, that larger companies were growing 5% per year faster than smaller companies. That difference is much higher than reality (indeed, smaller companies have historically grown faster, as they start from a smaller base); however, we’ll use 5% to make a point. Under this 5% assumption, it would be logical to think large-cap stocks would provide about 5% higher annual performance, other things equal. So what justifies 85% higher returns? In two words, nothing smart. Primarily, it’s nothing other than investors piling onto whatever has “worked” recently—similar to the way investors/ speculators piled onto the low-volatility mania while it lasted.