 Good day, fellow investors. Investing in small caps is tricky. There is a lot of volatility, some go down 90%, but if you get the right one, it can make the difference when it comes to your investing life cycle. A good small cap bought at the right time, the right time in history, it makes a huge difference to your portfolio. So in this video, I really want to explain investing in small caps, what are small caps, the definition, their behavior, the risks, the rewards, the small caps index funds and what I see there as a fallacy. And then the best strategy on how to invest in small caps that I have shared and I concur with Peter Lynch, one up on Wall Street, chapter six, he discusses how you can find 10 baggers within small caps, within your circle of competence around your home. So let's start with the video if you prefer reading, this is also a part of my free investment course, the link is in the description below and you can find the full article report in the course. So feel free to enroll in the course, each time there is a new video there, you get an email and then you know, okay, this is where I learn about investing and today we learn about small caps. Before starting, another link in the description below I have recently analyzed the complete small cap sector in the United Kingdom. So the FTSE 250 small cap sector that has stocks from the 316 to the 649 market capitalization level in the United Kingdom. And I have gone through the whole list, the whole 300 securities there and I have looked at interesting investments. You can read that also in a report, no point in doing a video on my notes there who is interested, link in the description below. And I have summarized it to 16 stocks and of those 16 I have analyzed one in that, that was interesting, kind of interesting. And that gave me the idea, okay, let's make a video about how to invest in small caps, what to look for and how to analyze them and what to be very careful when it comes to small caps. So let's start with that, the analysis, the definition and don't forget to read all the reports if you want to dig deeper into this matter. It will give you a great perspective on what's going on in the, let's say sector. So small caps stocks definition, those are defined with a market capitalization between 300 million and 2 billion. Usually it was with a market capitalization between 100 million and 1 billion. However, as the market is growing, also the definition of a small cap is growing and some index funds have market capitalization of 4 billion stocks with market capitalizations of 4 billion considered as small caps. In the future in the next 20 years, there will probably be a small cap up to 10 billion. That's how the market grows and evolves. Apart from the market capitalization, when you look at the small cap environment, you can find anything there. The recent IPO that just got a funding and therefore has a high market capitalization that includes it into an index. Then you have small niche companies or small geographical market companies that simply don't have the scale, the revenue, the ability to grow, but have a little mode in their own environment. Then you have crazy companies that do who knows what they change business models every Friday, but they are still there because a lot of money has been invested in the promises. And the more exuberant the market is, the more you have such promises in the sector. So it is a crazy environment. And the thing is it's really hard to get to the right small cap that makes a difference. Therefore, people tend to invest in small caps index funds or ETFs, but you have to see what is best for you. Let me give you a few examples about small caps investing rewards and risks. If we take a look at Walmart, adjusted for stock splits, the stock went from seven cents to the current $120 in 50 years. 1,000 without even counting dividends would turn into almost 2 million. With dividends, it would probably be more than 10 million. Similarly, if you pick Starbucks at its IPO 25 years ago, you would have turned 1,000 into 178,000 not counting dividends. For example, if you bought Starbucks in 1992 at 44 cents, the current dividend per stock is $1.63. So four times your investment would be what you get just from the dividend. So that's crazy. What can happen if you invest in the right small cap at the right time? However, both Starbucks and Walmart have been also very volatile because of their untested business models when they started. Many failed to grasp that Walmart considered such a great investment long-term, et cetera. The small cap stock fell 75% from 1972 to 1974. And this perfectly explains the risks of investing in small caps. Starbucks also fell 75% in the 2009 crisis. This is simply amazing. Walmart went from 6 cents to 1.6 cents adjusted for splits in just two years. So it would have been a great investment for those that invested in 72, even better in 74, but you had to survive the 75% decline. Similarly, many small cap stocks that were promising a lot in the past fall down but don't rebound like Walmart. A few examples are tailored brands, lumber, liquidators, holdings, and Fiesta restaurant group that are among the most famous. AAPLC, an IPO in the UK that was a really famous IPO for road assistance also is an IPO that really, really went bad. So you have these companies that promise a lot but then it's always untested business models when it comes to small caps. And then my footsie small cap index research show that out of five stocks, four do really, really bad and one does okay or one does great over one cycle. Of that one from five that does great over one cycle, over two cycles, you can again have the same game one out of five does really well. And so you can say if you invest in small caps randomly, nine will lose your money and one will do probably really good. It might be a 10 bagger and even more but that's the risk of investing in small caps and also something that explains their behavior because of the untested business models. Now, if you want to eliminate risk you can always be diversified and invest in an index fund, the small cap index fund or ETF. However, there are two big fallacies that I see there. When I looked at the footsie 250 small cap index, a lot of stocks there were not stocks at all were funds, trust, holdings that charge from the assets they manage they charge a high, high fee. So you invest in something you think, okay there is also a high fee for small caps and then on top of it, there is a hidden fee that these trusts charge on top of the fee you're already paying. So it's, they find funds, they list their fund the closed end fund and just thanks to the market capitalization, they are in the index fund and if you buy the index fund, if you buy the ETF then you are buying their funds and you're practically financing those that make money just out of financial schemes like those investing in the Asia funds or investing in this, investing in old stocks or something like that. If you look at the top list of the footsie 250 small cap you can see that it starts mostly with trusts and funds that all charge a big fee for their existence. If there is added value, I'm not going into that. Then the second thing is if you look at small caps, only a few of them succeed but if you hold an index fund when the small cap passes a certain market capitalization the index fund sells it. The S&P 600 small cap index sells about four billion market capitalization. So if you look at the stock like Amazon then it was a small cap at the beginning in 1997 but it already become a mid cap at 1999. So the index fund would have bought Amazon and then it would have sold it after just a year after a stock price went a bit higher and you would have missed on the next 25 years of its amazing performance. So if you want to hold a small cap basket or index it's practically better that you pick 20, 30, 50 small caps by yourself. The initial fee when you buy might be higher but then you can let it run forever for the next 20, 50 years if you find the right one and if you find the right one stick to it. Don't sell it like many have sold Amazon. However, there is one investment strategy that I agree with Peter Lynch that could be very, very interesting when it comes to small caps and that the strategy that I have applied in the past. It is to focus on what's going around what's going on around your home. You have a life and perhaps you will get one or two ideas per year but you will see, okay that restaurant is doing really, really good and people are loving it. Let me see if there is a stock. Oh, I'm going to this airport and now I'm going to the other airport because the airport is growing. Will there be a stock for that airport? Can be, I don't know, restaurant, coffee shop, shoe brand, whatever and then you can see, okay, this is interesting by just looking at what's going on in the market where you live, maybe you'll get an idea every two years, maybe you'll check that idea once every two years and maybe you will invest in just one of that free ideas that you get over six years but that one idea will give you an excellent advantage over others, over Wall Street because you will have first hand information, you will probably know some of the employees there, what's going on, it's your local area and you know your local area best. This allowed me to invest in 2010 in a little small cap that was a camping site. I saw the stock was going down but the business was still strong, the dividend was 8%, the company was growing at 15%, with huge growth plans, with extremely high returns on invested capital, that is usually the case when you own a camping site like this but the Norwegian fund didn't know what's going on, they were simply selling everything related to that little market where I found this small cap so the stock just went down, down and down and I just kept buying, it was a simple, easy five bagger for me. So follow small caps too and then when you find one that's in your sweet spot then you buy that. Don't be greedy and chase small caps, let them come to you. The sector, the market is very volatile that it offers often great small caps at ridiculously low prices. Something that's also very important is timing your small cap investment. Everybody's talking about over performance or under performance relative to large caps but I think that's also a flawed investing approach. What I think is you simply have to look at the fundamentals, follow five, 10, 20 small caps that you understand, learn about them and then give yourself time. If it is the really right investment, whether you invested in Amazon in 1998, 2002, 2006, 2009, 2012, 2015, 2018, you would still have done really, really great. So time your investment in a way that you really take advantage of the long-term trend and of the market sentiment towards small caps because yes, they outperform significantly and sometimes they really underperform at other times. So as the market likes to paint a sector or an asset class with the same brush, it is the time, when it's painting it negative, it is the time to really look because fundamentals is what matters. So the conclusion is very simple. Whether you're investing in small caps, mid caps, large caps, yellow caps or I don't know, stocks in Russia, Brazil, United States, Germany or a gold miner, copper miner, shoe seller, a sock maker, I don't know. It all actually doesn't matter about the sector or the asset class, it matters. What matters is the investment, the management, the mode, the fundamentals, the margin of safety, the cash flow, the growth, the projections, the capability, the competitiveness, the pricing power and all those things that really matter when it comes to investing. So in this video, I wanted to give you an overview of this asset class and then tell you that doesn't really matter if you are a real investor. If you are a relative investor speculating this is overpriced, underpriced, then be my guest and lose your money. But if you really want to learn about investing, then the message is and the reason for the video, don't be afraid to look at small caps. There are real gems there, but understand their behavior and give yourself time to really understand a business over the long term. If you want to learn more about how to invest in businesses, this is part of my free comprehensive stock market investing course. The link is in the description below. So feel free to enroll. There will be more videos about asset classes, accounting, how to analyze stocks, how to learn more about investing, about the correct investing mindset for reaching investment success in the long term. Thank you for watching. Looking forward to your comments. Subscribe also to the YouTube channel and I'll see you in the next video.