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The Stock Market, 2007
Style Matters More Than Size

by Steve Miller, President, OpenBIThursday, January 03, 2008

The stock market for 2007 is now in the books. Alas, an unusually poor-performing fourth quarter tied closely to the sub-prime lending meltdown has left most US investors less than fully satisfied. The dashboard below developed with the open source statistical package R (http://www.r-project.org/) provides insight on last year's major Morgan Stanley indexes (http://www.mscibarra.com/products/indices/us/performance.jsp) as well as a view of performance over the last fifteen years.

Statistical Package R Graph created by Open BI

The top half of the first figure shows the meanderings of 15 MSCI portfolios in 2007 via a trellis graphic organized by size (panels) and investment style (groups). Style appears to be a most important dimension of the returns for 2007. For each portfolio size, growth significantly trumped value last year, with neutral in between. Though there isn't much distance between neutral portfolios by size, the differences in style performance seem magnified for the smaller indexes. Those unfortunate enough to hold small or mid cap value actually lost money in 2007.

The bottom half of the first graphic is a reminder that style and size advantages shift in time. Whereas large and growth were highlighted in 2007, small and value dominate over 15 years. Indeed, small and mid cap portfolios have rewarded those holding since 1992 with $6.50-$7 for each $1 invested. Note the “bubbles” for growth and neutral portfolios for each size around March 15, 2000.

Statistical Package R Graph created by Open BI

The second figure deploys dotplots to show snapshots of portfolio performance over time. The first column details performance by size and style over recent very short term time periods. There appears to be quite a change in investor sentiment between five and ten days. The second column tells the sad story of a terrible fourth quarter that tempered overall 2007 returns. The damage for growth is considerably less than for value. And the third column clearly depicts the multiplicative nature of returns over time, showing in comparative panels the value of patience in the market. The results here seem to confirm our insistence in other columns on a 15 year time horizon to demonstrate solid investment returns.

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