Sometimes you just know. You know that the decisions you make during a predefined, limited window in time have reverberations far exceeding similar windows in different time periods. You know that opportunity is breathing down your neck and the culmination of all your experience is needed for it to be seized. You know that the opportunity for significant profit exists that can propel rates of return for years to come.
This happens to be one of those periods. In the small and especially micro-cap world, the market of 2014 has created a dislocation between price and reality. The intangible factors that go into investment decision making are being completely overlooked in favor of only the most obvious, textured type of information that can be easily understood and interpreted. The more complicated the situation, involving abstract, multi-faceted outcomes that cannot be easily interpreted utilizing stale modeling forecasts, the more the chances are that the stock is severely depressed.
There simply isn't a whole of interest. There isn't interest in digging for information. There isn't a desire for risk in the form of emerging companies. And the interest that exists is from those who are looking to trim the books into year end for cosmetic or perhaps, tax purposes.
The propensity towards rotation has been obvious for most of this year. 2014 has been the year of the large-cap. Even more pointedly, it has been the year of the favorite large caps. It has been an extremely narrow run to the upside, with old school favorites like AAPL and BAC leading the upside. The market has been very comfortable with leaving some key names behind. It has certainly been comfortable with leaving a majority of small-cap names behind. The Russell being basically flat for the year doesn't begin to describe the pain being felt, mostly in the form of frustration, by a majority of small-cap investors.
Just as the rotation favored large cap names in 2014. The money will rotate back into small-cap names in the years ahead. I published a study a couple of months back that showed what the Russell 2000 does following both down years and years where the S&P is up while the Russell is lackluster in nature. The results showed a definite propensity towards significant outperformance in the year that followed either the down or lackluster relative year in the Russell. The outperformance in most years was double digit in nature for the Russell following such an event. I expect that 2015 will yield a similar result.
I've been spending all of November checking, rechecking and once more checking my work. I have been scavenging the detritus for signs of vibrant life buried beneath the rubble. I want to be concentrated in the best opportunities available going forward. No more than 3-4 names that will make up 90% of the portfolios exposure. I want concentration because I believe that my best opportunity for outperformance lies in my best ideas. Companies that I can become intimately familiar with through extensive research. Diversifying into even 7-8 names at this point will only diversify away from opportunity.
The engine for performance in 2015 is being built right now. I'm in the thick of it.
