Small-Cap Index Funds Are Good Investments, But With A Caveat

I’ve been trying to work my way through reader questions that also would be good material for inclusion on this stock, and I reached an intelligent question from a reader that wanted to know why I don’t write about small-cap index investing on this site all that often, given what he called the proof of their permanent superiority as investments. The “proof” he was referring to is this: According to research conducted by Ibottson & Associates measuring the 1926 through 2013 time period, an indexed collection of small American companies delivered returns of 12% per year. A similarly indexed collection of large American firms delivered annual returns of 10% per year over that same time frame.

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2,000 Shares Of General Electric Bought During The Financial Crisis

It only happens three or four times in your life, making it a Haley’s Comet sort of thing, but you do receive the once in a generation opportunity to both (1) buy a high-quality company and (2) do so at a period when the company is severely, deeply, truly on sale. Although the opportunities when you get to take advantage of both conditions simultaneously are rare, the good news this: the happy consequences of taking advantage of such an opportunity can last a lifetime.

One such reader, Kevin, wrote in to me and shares his story with taking advantage of General Electric, and gave me permission to share his story as long as I kept the details loose. It was in 2009, and General Electric had cut its legendary dividend from $0.31 to $0.10 per share. But Kevin had an important insight—even in 2009, General Electric made $11.4 billion in net profit. No one talks about that; the focus is always on the collapse of GE Capital, the dividend cut from $0.31 to $0.10 per share, and the collapsing share price from $38.50 per share in 2008 to $5.70 per share in 2009. For retirees, those results were terrible—a violation of General Electric’s informal covenant with mom and pop American investors as the bluest of the blue chips dating back to the 1890s. But for long-term investors with a value bent, it was a once in a lifetime opportunity to ready, aim, fire. Kevin struck, and purchased 2,000 shares of General Electric at the very depressed price of $12.30 per share.

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