The Last 10 Years; Why These
Stocks Have Always Done Best

returns on small-cap stocksWhen investing in the stock market, for years I’ve favored small-caps, penny stocks and even micro-cap stocks over big-cap stocks. Why?

“The proof is in the pudding,” as they say. Big company stocks tend to move up and down with the general stock market. Small company stocks can see their stock prices immediately affected by changes in management, marketing practices, and new product development and discoveries. Big companies, with so many divisions, cannot benefit as quickly from the changes listed above.

It’s been 10 long years for investors and, I’m sorry to report, investors in big company stocks have not fared well at all. Below, please find the closing level of the Dow Jones Industrial Average on December 31 for every year going back to 2000:

December 31          Dow Jones Industrial Average

2000                                                10,786

2001                                                10,021

2002                                                 8,341

2003                                                10,453

2004                                                10,783

2005                                                10,717

2006                                                12,463

2007                                                13,264

2008                                                  8,776

2009                                                10,428

2010                                      11,491 (Dec. 20/10)

The reality is that, if an investor had bought a basket of the Dow Jones Industrial stocks in 2000, he or she would only be up 6.5% in 10 years! The dividends these big company stocks paid each year hardly kept up with inflation.

Comparatively, the Russell 2000 Index of small-cap stocks is up about 100% over the past 10 years.

I monitor the action of the big market index every day here in PROFIT CONFIDENTIAL to establish the market direction, which is of utmost importance to all stock sectors.

But when it comes to investing in individual stocks, the real money in investing is in small-caps, penny stocks, and micro-cap stocks. Unlike the big-cap stocks, there are over a hundred examples of small company stocks I can give my readers that are trading today at 10 times what they traded in 2000. And that’s why I would never invest in big-cap stocks; they simply don’t have the profit potential of small company stocks.

Ask yourself, will companies like Microsoft, Wal-Mart, GE, IBM or American Express double in size in the next five years? No. But there are hundreds upon hundreds of small companies that will.

(Just as an FYI, there is not one major gold producer I could even classify as a big-cap stock. Newmont Mines (NYSE/NEM), the grand-daddy of big gold mining companies, has total market value of $29.0 billion. The majority of the 30 stocks that compromise the Dow Jones Industrial Average have market caps in excess of $100 billion.)

Michael’s Personal Notes:

I’m surprised to see news reports this morning that France may face a downgrade of its bonds. If you remember, Greece was the first country to face a credit crisis, followed by Ireland, and then credit agency downgrades of bonds issued by the governments of Portugal and Spain.

If I were a betting man, I would have thought Italy would have been the next country to face a credit agency downgrade of its bonds. And I continue to believe it will be the next major European Economic Community (ECC) to face financial problems, especially in light of the country’s delicate political environment.

France was the first real European country to take serious austerity measures, such as raising the official retirement age to 62 from 60. France is simply a casualty of a downgrading of debt sweeping the entire ECC.

How can an investor make money from all the debt downgrades and credit crises hitting European countries? Shorting the euro is too risky. The easy money has already been made on the euro. Shorting specific European country bonds has been a big play this year and there is still likely money to be made with that play.

But for average-risk investors who prefer to invest in their own backyards, the best play in 2011 will be to take a vacation in your favorite European country. Top-rated European hotels are offering the best deals I’ve seen in years. The tourism industry is hungry right now in Europe. We will see some great deals on travel to Europe this summer.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens today (what will be a quiet trading week) up 10.2% for 2010. The bear market rally that started in March of 2009 tapered off in 2010, but still provided investors with a decent return for the year.

I’m of the opinion that this bear market rally still has leg left. I’m concerned going into 2011 about long-term interest rates rising, but in the immediate term I’m still bullish on stocks.

What He Said:

“Investors have been put into an unfair corner. Those that invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now, those that have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi in PROFIT CONFIDENTIAL, May 27, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.