Peter Lynch: Invest In Small-Cap Stocks, If You Have The Stomach

In his book – Learn to Earn, Peter Lynch discusses why you should invest in small-cap stocks instead of large-cap. Here’s an excerpt from the book:

Over time, it’s been more profitable to invest, in small companies than in large companies. The successful small companies of today will become the Wal-Marts, Home Depots, and Microsofts of tomorrow, It’s no wonder then that funds that invest in small companies (the so-called small caps) have beaten out the “large cap” funds by a substantial margin. (“Cap” is short for “market capitalization”—the total number of shares issued by a company multiplied by the current share price.)

A couple of Wal-Marts is all they need to outperform the competition. That one stock is up more than two-hundred-and-fifty-fold in twenty years. Since small-cap stocks are generally more volatile than large-cap stocks, a small-cap fund will give you more extreme ups and downs than other types of funds. But if you have a strong stomach and can take the bumps and stay on the ride, you’ll likely do better in small caps.