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(B)(N) The Small-Cap Guy

May 19, 2014
The Small-Cap Guy

The Small-Cap Guy

Drama. We don’t mind buying and holding small-caps (those with aggregate market value less than $2 billion or so) as long they’re trading at or above the price of risk.

The main problem with them is that a small event or some unexpected news can trigger a major price increase or price drop and it can happen in a day, while we’re out to lunch, so to speak. And they can easily be, and often are, “bushwhacked” by the hedge funds both up and down; please see, for example, our recent Post on HIMX Himax Technologies Incorporated but there are also many other examples (thousands of them and hundreds in these Posts) in the social media, biotech, restaurant, resources, and high-tech stocks.

But that problem is easily solved by an attentive stop/loss policy that locks in gains at a reasonable level while we continue to hold the stock through an uncertain future as long as it’s trading above the price of risk; in other words, we let the market decide when it’s time to say bye-bye and, in general, we don’t know anything else about the stock or the company or its business. It’s just a stock and we’re playing it for the money and no other reason; for example, we don’t care whether the company makes money or not and we’re indifferent to the next earnings report; all we care about is whether other investors are likely to buy and hold these stocks at prices above what we paid for them.

The S&P TSX Completion Index has a basketful of them and we thought that we’d take a look to see how we’re doing in that market; please see Exhibit 1 below for the modern fundamentals.

Exhibit 1: S&P TSX Completion Index – Fundamentals – May 2014

S&P TSX Completion The Small-Cap Guy - Fundamentals - May 2014

S&P TSX Completion The Small-Cap Guy – Fundamentals – May 2014

(B)(N) S&P TSX Completion The Small-Cap Guy (ALL) - Risk Price Chart - May 2014

(B)(N) S&P TSX Completion The Small-Cap Guy (ALL) – Risk Price Chart – May 2014

(B)(N) S&P TSX Completion The Small-Cap Guy (B) - Risk Price Chart - May 2014

(B)(N) S&P TSX Completion The Small-Cap Guy (B) – Risk Price Chart – May 2014

(B)(N) S&P TSX Completion The Small-Cap Guy (N) - Risk Price Chart - May 2014

(B)(N) S&P TSX Completion The Small-Cap Guy (N) – Risk Price Chart – May 2014

Based on the chart on the left, it doesn’t look like the small-cap guy is having a lot of fun.

There appears to be nearly nothing that was eligible for inclusion in the Perpetual Bond™ until after the run-up from $500 billion to $600 billion last year and now, there’s nothing again.

But to understand what’s going on, we need to lift the cap a little and separate the market into those companies (115 companies) that are a (B) now and have been a (B) for most of last year, and those companies (63 companies) that are an (N) now; please see the two charts on the left.

Nearly all of the impressive gains in the (ALL)-chart above occurred in the (B)-companies and the percentage gain +22% is much bigger than the whole market (+10%) and the (N)-companies are mostly losers (-16%) and that’s a distinction that can’t be made by a macro-market player or hedge fund or a “volatility and co-volatility” analysis that is typical of most mutual funds and pension plans that buy everything.

In other words, the price of risk separates the market into a group of companies, the (B)-companies, that behave like a risk-free bond, and its exact complement, the (N)-companies, that behave like an at-risk portfolio of stocks beset by uncertainty.

The Thinking ManIn this market, the all cash no margin equal-weighted-by-value Perpetual Bond™ (which is only (B)-stocks when they are (B)-stocks) gained +26% last year and is up another +12% so far this year and the moderately leveraged portfolio is up an embarrassing +29% so far this year; what can we say but “money is cheap on Wall Street” and all we need to know is how to pick it up and keep it no matter what the cap.

Please click on the links (and again to make them larger if required) for all the details “(B)(N) S&P TSX Completion Small-Cap Guy – Prices & Portfolio – May 2014” and “(B)(N) S&P TSX Completion Small-Cap Guy – Portfolio & Cash Flow Summary – May 2014“.

For more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more information on real “risk management” and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary; we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for.

And for more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.


We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to


Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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