 Good day fellow investors. I read a few comments saying that small caps are very, very overvalued. Then I came across a Wall Street article that said the same and this got me interested. Okay, are small caps really overvalued? I know they had a great performance. So I really wanted to see by how much are they overvalued? Are they overvalued? Or it is just the market who is telling you something while it's actually the opposite. Let's dig into it. This is extremely important. If you would have invested $10,000 in the iShare small cap ETF since 2009, you would now be sitting at almost $60,000. That's 600% and that's a huge, huge performance and it outperformed the SAP 500 by large. However, on the valuation side, the price to earnings ratio of the ETF is 22.48. The price to book ratio is 2.19 and both are below SAP 500 levels of 25 and 3.32 respectively. The dividend yield is 1.26 for the small cap ETF, which is below the SAP 500 dividend of 1.8%. However, if you invest in the small cap ETF, unlike the SAP 500, you are very, very well diversified. The top 10 names in the SAP 500 make 20% of the index. The small cap ETF composition is much, much better spread with the top company making just 0.6 of the ETF. According to valuation, small caps might not be overvalued. However, there is a huge risk for small caps and that's why always in the past, small caps deserve the premium. The market cap of the iShare small cap ETF is $37 billion and that's not the only small cap ETF there. The SAP 600 small cap index that makes the ETF includes companies with market caps between $400 million and $1.8 billion, with median of $1.1 billion, which makes the total market cap of the index $660 billion. This means that just this ETF that we are now discussing has 5.7% of the index. Other ETFs, they still hold some names, so if there would be selling pressure on small caps and most of those companies are really small companies with little floats privately owned or whatever, then you would see a big, big hit or small caps. And this is why small caps are usually riskier than any other stock because the market is shallow. There is no deep market and stocks can really, really drop very, very fast. Let's see another ETF, the Russell 2000 ETF. So again, the price to earnings ratio is $20.90 in the price to book ratio $2.27. The sector also looks very well diversified and no holding has more than 0.6%. Financials, IT, health care, industrials, consumer discretionary, so good perspective on what's going on. A lot of banks, but okay, so you know what you own, price to earnings ratio $20. Total value of the ETF index is $44 billion with a weighted average market cap of $1.3 billion for constituents. So a little bit less liquidity risk than the SAP 600 small cap ETF, but still very, very risky exposure. From a fundamental perspective, you see a lower price to earnings ratio, but this doesn't mean that the small caps are undervalued. It means that they are overvalued because if we go back to 2000, 2009, the price to earnings ratio of small caps in 2000 was 10. The SAP 500 was 45 and that's the difference in premium. Usually small caps have because there is much more volatility. Anything can happen with small caps. They are not established. It's a crazy environment there. And when you see small caps trade equally to the established SAP 500, that's a crazy situation. And when you see that the market increased 600% in the last nine years, that's even crazier because you know that as fast as it went up, the downward road is even faster and it can happen immediately as soon as the ETFs or the holders of those ETFs start selling. And we all know that they hold ETFs so that they can sell, they can have liquidity. As long as that goes up because there are more and more inflows, it's good. But when panic hits such a shallow market, then all hell breaks loose. So from a risk perspective, there is huge, huge risk in the small cap environment. And I would look at a small cap sector investment like an ETF or a fund when the price to earnings ratio is 10 or below 10 or the CAPE ratio is 10 or below 10 because then I know that the long term returns will be well. Now, extremely crazy and extremely overvalued. However, this doesn't mean that you shouldn't invest in small caps because small caps give you a huge opportunity because if you can find the stocks that are still small, that become great, you get yourself huge, huge returns. And if you find those small great businesses, the valuations doesn't matter. If you pay 30 or if you pay 10 for a stock, it doesn't matter after 30 years if it will be a return of 30,000% or 15,000%. Absolutely doesn't matter to your financial well being. Let me show you. This is the chart of Walmart from 1972 from the IPO to 1977. If you would have invested $1,000 in Walmart in 1972, your dividend, your dividend now would be around $90,000. Yes, 1000 dollars, your yearly dividend now would be 90,000, which is a spectacular return. However, in a short-term perspective, risk-reward perspective, or you say overvalued small caps, undervalued, you would have lost what 66% from 1972 to 1974. Those who invested 1,000 in 1975 are now having three times the dividends. They had 270,000 of dividends from $1,000 investment in Walmart. That's crazy. Nevertheless, 80,000 is great, 270,000 is still great, and it doesn't really matter. And you cannot time that decline that happened in 1974. And that's terrible if you miss such an opportunity as Walmart was, because you are afraid that the stock might drop 50%. If it's a great business, a great stock, you don't care if it will drop 50% in the next three years in the next recession. If it is that great, you will simply buy more, more, more. You will sell other things, you will buy more. But you must put things into perspective. If after 20, 30 years you will have a dividend that's 100 times your current investment, if there is a risk for that, then you really don't care about the short-term one, two, three, four, five years volatility. And that's the way to invest in great businesses. Now, how to find such businesses? Very, very simply. You take the whole small cup environment of 5,000 stocks, and you go one by one by one by one. When you pass the whole 5,000, you will get a good view on the sector, on the environment, and you will see what happened, who won, who lost, and you will manage to find the 10 stocks that have the potential to do great. And of those, one, two, three will do great in the long term. Oh, 5,000 stocks is that too much where nobody said that getting rich is easy. On that terrible disappointment, thank you for watching. I'll see you in the next video. Looking forward to your comments, small caps ideas, what do you think about investing in small caps? See ya.