The Case for a “Small-Cap Summer”

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During their recent episode, Taylor, Carlisle, and Brewster discussed The Case for a “Small-Cap Summer”, here’s an excerpt from the episode:

Tobias: It took me a little bit of time to read my writing here, but smalls have been hosed. Smalls are back to the 2020 lows relative to the market, relative to the index. I tweeted this out-

Jake: Every day for the last– [laughs]

Tobias: -at least once a week.

Jake: Yeah. [laughs]

Tobias: I tweeted it out with the Simpsons principle saying “Pathetic.” That upset some people. As a person who exclusively holds smalls, I feel like I’m allowed to criticize the smalls.

Jake: Yeah.


Bill: There has to be some value there.

Tobias: When I look at the universe and the cash flowing, the better part of the universe that you want to own, I think that the universe of smalls and micro has better forward returns than the universe of mid and large, even though the universe of mid and large, I think the cheapest is right at the very cheapest, smallest end of mid and large. So, I would say the smallest end of mid and the smallest of the smalls looks to me to be reasonable value at the moment, better returns, anyway. But I’ve said that a few times. Someone’s calling for a, “Small Cap Summer. Bacon. There we go, Small Cap Summer, let’s go.

Bill: I don’t know that I’d call for a small cap summer. That sounds risky.

Tobias: I’m not calling for it. I’m hoping for it.

Bill: All right. So, this came from the person that presented at Robotti’s thing at Markel was from Royce. I believe his name was Miles. Hopefully, that wasn’t his last name.

Tobias: How do they feel about the smalls?

Bill: Well, funny thing when you ask-

Jake: Strong to quite strong.

Bill: -a barber for a haircut. But he said that, even compliance would sign off on this. When the Russell has been negative for three years, forward returns are positive over the next three years, 100% of the time. He said he ran it by his compliance department and they said that that was okay because it’s actually factual. Now, whether or not it’s true going forward, good luck.

Tobias: Because it’s just a price action. Price action over the last three years has been bad. So, price action over the next three years should be good. I personally hope that’s true. It’s motivated reasoning, I hope it’s true. But it’s not a valuation fundamental discussion.

Bill: Yeah. Well, that’s facts.

Jake: It’s a bit of that gambler’s fallacy, really, like, “Oh, it’s been black three times in a row, it’s going to be red.”

Tobias: Yeah, go, get on the red.

Bill: Just got to keep doubling down. That’s how the math works.

Jake: Martingale it. Yeah.

Bill: Yeah. And then buy calls.

Jake: The math checks out.

Bill: Yeah.

Tobias: Buy calls and then we’ll start pumping it on this podcast, doesn’t it?

Jake: Imagine what we could do.

Bill: Here goes all my reputation. Fuck it. I’m retiring after this, no matter anyway.

Jake: There’s $300 worth of AUM listening to this.


Bill: That’s a little–

Tobias: I’m already fully invested in, so there’s nothing I can do to give it a goose.

Bill: Yeah.

Jake: Well, leverage, Toby. Come on.

Tobias Well, that is true. That is true.

Jake: You could be a pod shop and just–

Tobias: As you say, we can martingale and go it all the way down. I don’t know how many times I can double up before I’m dusted. But it’s not many.

Bill: I might as well try.

Jake: Dusted before he even got the double. [laughs]

Tobias: We haven’t had a decent crash. So, there’s no point doing it here.

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