Excerpted from Common Sense on Mutual Funds by John C. Bogle, pages 233-235

Now to my third sector. One of the seemingly indestructible myths of investing is that stocks with small market capitalizations outpace stocks with large market capitalizations over time. Having accepted this proposition, its proponents then explain why, in terms easily understood: Small caps carry higher risks, therefore it follows, as the night the day, that they must earn higher returns. This reasoning would seem to make consummate good sense. But, in fact, as shown in Figure 10.5, the cycles of small-cap superiority have been relatively spasmodic. From 1925 through 1964 - a period of fully 39 years - small caps and large caps provided identical returns. Then, in just four years, through 1968, the small-cap return more than doubled the large-cap return. Virtually that entire margin was lost during the next five years. By 1973, small caps were about at part with large caps for nearly the full half-century. The small caps' reputation was made largely during the 1973-1983 decade. Then, perhaps inevitably, RTM (reversion to the mean) struck again in a fifth cycle. Paralleling the observation of the poet Thomas Fuller in 1650, it was darkest for the large caps just before the dawn, for the sun has shone brightly upon them since 1983.

YAHOO! FINANCE TIP Yahoo! Finance reports a company's market capitalization on its key statistics page. For an example, see GE's key statistics page.

On balance, for the full period, the compound annual return on small-cap stocks was 12.7 percent, compared with 11.0 percent for large-cap stocks. This difference resulted in a terminal value for small-cap stocks that was three times that of large-cap stocks, as shown in Figure 10.5. But, given the dominance of small caps in a single decade, I'm not sure I'd rely on it. (Certainly the truly awesome strength of large caps, in a so-so 1998 for small caps, meant it was not wise to accept uncritically the small-cap thesis). Without the relatively brief cycle of small-cap domination in 1973-1983 - only one of seven decades in the period - large caps were actually superior. When that period is excluded, annual returns were: large caps, 11.1 percent; small caps, 10.4 percent. In any event, the relationship between large caps and small caps, if not entirely dominated by RTM, is permeated with the force of market gravity.