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It turns out that, perhaps surprisingly, the stocks that are most in the limelight, most followed by analysts, and most recommended do not generally perform with healthy total returns as well as the shares of relatively neglected companies.
For example, while over the past three years stocks in the Standard and Poors 500 have gone down roughly 40%, the smaller, more neglected companies' stocks have actually been up during the same period.
This tendency is dramatic when one examines the Nasdaq and the Wilshire 5000. Per the November, 2002, issue of "AAII Journal," while the Nasdaq Composite index (heavily weighted for large-cap stocks) had been down, in 2002 alone, over 39% prior to AAII's 11/02 publication, the merely average stock on the Nasdaq was up over 30% (and had been up each of the last three years).
The ten year return of the average (that is, unweighted by market capitalization) Wilshire 5000 stock, again as of that AAII printing, was 276.3% (a compound annual return of 14.17%), despite the 2000-2002 bear market.
During the same ten year period: micro-cap stocks provided compound annual returns averaging 13.54% a year; REITs, 12.69%; and small-cap value stocks, a whopping 14.82%. All of these compare favorably with the more prominent and large-cap S & P 500 index, which returned 10.31% a year in that decade.
Selecting for micro-cap, small-cap, or average stocks, rather than well followed large-cap ones, is just one way to focus on generally higher performing neglected holdings. It is useful also to screen out equities with more than 15% institutional ownership. The lower the level of ownership by large institutions, the fewer the number of analysts likely to be following the security. The ordinary individual investor thus has an advantage when searching for value among such relatively undiscovered stocks.
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