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Small Caps: The Easy Game for Active Managers?

The odds may be better for small-cap managers, but they're still long.

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Imagine you've entered a poker tournament and have the choice to sit at one of two tables. Seated at table one are enthusiastic newbies you surmise as being likely to show their hands, bluff badly, or make otherwise unwise bets. At the second table are players you recognize as contestants from the World Series of Poker. You might relish the challenge of taking on the latter, but playing the amateurs instead of the pros would maximize your chances of winning.

The table of amateurs offers what the insightful strategist, author, and professor Michael Mauboussin calls "the easy game." Easy games are those whose players aren't very skilled, and the payoff from winning is high.

Christopher Davis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.