Just about every investor has a story about a small-company stock that produced dazzling returns. In 1981 a Swiss economist named Rolf Banz offered evidence of the outperformance of “small caps.” (That’s short for companies with small market capitalizations — the cost to buy all of their shares.) In a study published that year in the Journal of Financial Economics, Banz showed that the 50 smallest companies listed on the New York Stock Exchange outperformed the 50 largest companies by about 1 percent a year from 1931 to 1975, after adjusting for differences in trading volatility, which can affect returns. More recent, broader studies that adjust for more variables that affect stock returns, put the performance advantage of small caps at closer to 2% a year.[Read more...]