Book Reviews, Value Investing

Brian Bares: The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks into Big Returns

The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks into Big Returns

This is a book with the dual purpose of on the one hand teaching aspiring small-cap portfolio managers how to set up shop and on the other hand giving institutional investors a better feel of what to look for when performing due diligence of small-cap managers. In respect to this aim the grade is unfairly low.

However, this is not the book that Brian Bares should have written and it quite annoys me. On the sleeve, one of the reviewers claims that Bares “is the Warren Buffett of small and microcap stocks” and in scattered sections the writing is very insightful. However, ask yourself, would you rather watch the paintings of Vincent Van Gogh or hear him discussing various ways to organize a studio; would you rather watch Michael Jordan play basketball or read his writing on potential methods to run an NBA-franchise?

I certainly would have wanted this book to give me the full account on how the Texas based Bares Capital Management so successfully have managed their small-cap portfolios. The book gives the top down view on the pros and cons of investing in small-cap equity and on the options of indexing vs. active strategies such as either quantitative or fundamental ones. The choices for fee structures, organizational and legal setup are discussed, as is the fundraising process where a number of types of investors into smallcap funds are presented including the endowments. I have almost no objections to what is said and must commend the author’s integrity in debating the many areas where there arise agency issues, i.e. where the interest of the PM and the end-investor aren’t fully aligned

See more here and more on book below

The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks into Big Returns

A world-renowned money manager shares winning strategies for small-stock investing

Since forming Bares Capital Management, Inc. in 2000, Brian Bares has shown that above average returns can be generated through the careful selection of small company common stocks. Additionally, he’s shown how concentrating capital in a handful of ideas improves the potential for outperformance by increasing the depth of knowledge of each position and allowing each security to have a more meaningful impact on the portfolio. In The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks Into Big Returns, Bares describes how endowment-model investors and aspiring managers can gain meaningful exposure to small stocks while sidestepping many of the obstacles that have historically prevented institutional investment in the asset class. The book also

  • Details the historical outperformance of small-cap stocks
  • Contrasts the various strategies employed by managers in the space
  • Explains how aspiring managers can structure a firm to boost performance and attract institutional capital
  • Describes how endowment-model institutions can evaluate and engage outside managers for their small-cap allocations
  • Summarizes important topics such as liquidity and the research process

Bigger is not better. The Small-Cap Advantage reveals that small stocks have historically performed better than large ones, and that lack of competition in small-cap stocks provides diligent managers with a singular opportunity to outperform.

The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks into Big Returns

 

The Small Cap advantage

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