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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 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
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.
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.
208 pages, Hardcover
First published January 19, 2011
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Displaying 1 - 8 of 8 reviews
August 21, 2018
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 micro- cap 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 small- cap 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.
But it’s still fairly dull as a text – the legal entity could be this or that, the traits of a compliance officer should include the following, the pros and cons of outsourcing back office are these etc. The spark arises in the short passages when topics like, how to get an investment edge (quoting Bill Miller’s trio of informational edge, analytical edge and behavioral edge), fundamental investment research, position sizing, the roles of analysts vs. PMs and similar front-office activities are touched upon.
Barnes Capital Management invests in businesses with good potential for long term compounding of business value. They focus on moats, exceptional managers and growth driven by the ample opportunities to reinvest capital at high return on capital. Their portfolios are very concentrated with 8 to 12 positions, “weighted heavily” in the highest-conviction ideas. There are certainly things to discuss, say the art form of deciding who are the exceptional managers and if this differs in small- cap investing with more owner-managers than in the large-cap area etc. Which mistakes have they made in assessing management and what did they learn? Or why not describe how to add other measures of safety to compensate for the lack of diversification? Topics like these are quickly glanced over.
For financial planners, endowment officers etc. the text delivers a basic checklist in prose on how to evaluate this investment area. For anyone new to professional money management who is in the process of setting up a small-cap portfolio, most practical aspects are ticked off to get him off the ground. The person who instead wanted to get a fuller text on the art of small-cap investing with real-life examples from a firm that has had success in the area will have to wait for the next book.
It is probably unfair to judge a book for what it could have been instead of for what the author’s stated intentions for writing the text actually was. However, I can’t help feeling cheated of a chance to learn something much more valuable than differentiating between a hedge fund and a managed account.
On the sleeve, one of the reviewers claims that Bares “is the Warren Buffett of small and micro- cap 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 small- cap 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.
But it’s still fairly dull as a text – the legal entity could be this or that, the traits of a compliance officer should include the following, the pros and cons of outsourcing back office are these etc. The spark arises in the short passages when topics like, how to get an investment edge (quoting Bill Miller’s trio of informational edge, analytical edge and behavioral edge), fundamental investment research, position sizing, the roles of analysts vs. PMs and similar front-office activities are touched upon.
Barnes Capital Management invests in businesses with good potential for long term compounding of business value. They focus on moats, exceptional managers and growth driven by the ample opportunities to reinvest capital at high return on capital. Their portfolios are very concentrated with 8 to 12 positions, “weighted heavily” in the highest-conviction ideas. There are certainly things to discuss, say the art form of deciding who are the exceptional managers and if this differs in small- cap investing with more owner-managers than in the large-cap area etc. Which mistakes have they made in assessing management and what did they learn? Or why not describe how to add other measures of safety to compensate for the lack of diversification? Topics like these are quickly glanced over.
For financial planners, endowment officers etc. the text delivers a basic checklist in prose on how to evaluate this investment area. For anyone new to professional money management who is in the process of setting up a small-cap portfolio, most practical aspects are ticked off to get him off the ground. The person who instead wanted to get a fuller text on the art of small-cap investing with real-life examples from a firm that has had success in the area will have to wait for the next book.
It is probably unfair to judge a book for what it could have been instead of for what the author’s stated intentions for writing the text actually was. However, I can’t help feeling cheated of a chance to learn something much more valuable than differentiating between a hedge fund and a managed account.
January 13, 2018
Main take always:
1. Operating within the small cap environment can allow investors to exploit inefficiencies in the market place that are not available to mid/large cap investors/investment firms.
2. Principle based investment philosophies and processes are the key to sustained growth for aspiring investment managers.
3. Humility and integrity are the most important qualitative factors when evaluating emerging managers when looking for long term relationships between managers and institutions.
Refer back to this book when you're ready to start an investment firm. Lot's of detailed information that will can provide practical knowledge. Great insight into the world of asset management.
1. Operating within the small cap environment can allow investors to exploit inefficiencies in the market place that are not available to mid/large cap investors/investment firms.
2. Principle based investment philosophies and processes are the key to sustained growth for aspiring investment managers.
3. Humility and integrity are the most important qualitative factors when evaluating emerging managers when looking for long term relationships between managers and institutions.
Refer back to this book when you're ready to start an investment firm. Lot's of detailed information that will can provide practical knowledge. Great insight into the world of asset management.
July 29, 2021
This is a solid book explaining the small-cap market, its advantages and disadvantages, how to start a fund, and how to perform due diligence on other fund managers. While it does provide some information related to characteristics of good investments, the majority of the book is focused on how to start a fund or invest in funds. As such, this book is a good read for aspiring or current portfolio managers but would be of limited use to a retail investor or someone looking to learn about the investment process itself.
March 24, 2022
An exceptionally good book with one fabulous character you won’t forget. Alexi Starlight is a little clumsy, charming and the type of person you would want to have as a best friend. What others see as her weaknesses, BaronBrightmore sees as her strengths. She has been belittled so much as a wallflower that she has started to believe what everyone says. Can one drunken rogue remake himself to have her love?
April 11, 2025
I only read the first three chapters, and then skimmed the rest. The first three chapters were really good. The book is catered more towards institutional investing, but the first 3 chapters were applicable to all, I think.
April 6, 2019
A nice book with many useful nuggets of fund management business esp for people who are just entering the industry. Unlike the name, the pearls of wisdom are equally applicable for all-cap managers.
August 28, 2014
An excellent guide for beginners and aspiring Fund managers
The book has very interesting things about small caps, but IMHO its core is aimed to those who want to pursue or are already beginning a career as a professional Fund managers, and this is so because Bares outlines the pros and cons of some of the most basic and important themes that every Fund manager has to deal with before they even start to operate and after that.
I think the title falls short of all the things we can get from this book. Even though Bares talks about Small caps, its advantages and some interesting tricks, the truth is at least for me, the book is kind of a road map for all those aspiring to become fund managers and to start with the right foot because there are a lot of important things that we must consider before start managing other people's money, and Bares talks about almost all of them in a very nuanced way. I believe that the principles and advice in this matter can be implemented to a wide variety of strategies for those starting in this path.
The book has very interesting things about small caps, but IMHO its core is aimed to those who want to pursue or are already beginning a career as a professional Fund managers, and this is so because Bares outlines the pros and cons of some of the most basic and important themes that every Fund manager has to deal with before they even start to operate and after that.
I think the title falls short of all the things we can get from this book. Even though Bares talks about Small caps, its advantages and some interesting tricks, the truth is at least for me, the book is kind of a road map for all those aspiring to become fund managers and to start with the right foot because there are a lot of important things that we must consider before start managing other people's money, and Bares talks about almost all of them in a very nuanced way. I believe that the principles and advice in this matter can be implemented to a wide variety of strategies for those starting in this path.
January 16, 2013
I knew it.
Displaying 1 - 8 of 8 reviews