BRIAN T. BARES, CFA, is a research analyst with Bares Capital Management, Inc. He founded the firm in 2000 with the belief that concentrated portfolios of inefficiently priced small companies could lead to high relative compounding. His firm manages the institutional portfolios of small-cap and micro-cap common stocks in long-only, replicated separate accounts. Mr. Bares began his career by working his way up from the bottom. From compliance and operations, to trading and portfolio management, he garnered experience in nearly all aspects of running a boutique small-cap management company before starting his own company. He graduated from the University of Nebraska with a degree in mathematics. His investment philosophy and strategy have been profiled in Value Investor Insight and the Manual of Ideas: Portfolio Manager's Review. Mr. Bares holds the Chartered Financial Analyst designation and is a member of the CFA Society of Austin. He resides in Austin, Texas, with his wife and two sons.

• Introduction xiiiAcknowledgments xviiCHAPTER 1 The Small-Cap Advantage 1Two Sources of Outperformance 1Small-Cap Definitions 2The Outperformance of Small-Cap Stocks 10Outperformance within the Small-Cap Space 15Chapter Summary 19CHAPTER 2 Small-Cap Disadvantages 21Research 21Trading 23The Small-Cap Graveyard and Reverse Survivorship Bias 28Capping Assets 29Chapter Summary 31CHAPTER 3 Small-Cap Investment Philosophy and Process 33Institutional Approach 33Passive and Enhanced Indexing in Small-Cap Stocks 34Active Management in Small-Cap Stocks 36Chapter Summary 70CHAPTER 4 Small-Cap Manager Organization 71Creating Value for the Manager 71Launching a Small-Cap Firm 72Investment Team 86Chapter Summary 94CHAPTER 5 The Fund-Raising Process 95General Marketing Strategy 95Institutional Clients 98Foundations and Endowments 104Consulting Firms 105Pension Plans 108High-Net-Worth Individuals 112Wrap Fee and Other Subadvisory Relationships 114Databases 115Third-Party Marketers 116The Chicken-and-Egg Problem 118Chapter Summary 119CHAPTER 6 Fees, Agency Issues, and Other Performance Drags 121Common Performance Drags 121Frictional Costs in Small Caps 124Institution-Manager Agency Issues 129Agency Issues in Trading 131Benchmark Tyranny 133Commingled and Separate Accounts 134Chapter Summary 138CHAPTER 7 Small-Cap Managers and the Endowment Model 139The Endowment-Model Approach to Small Caps 139Finding an Edge 142Funding Smaller Managers 145Funding Emerging Managers 147Finding Emerging Managers 149Chapter Summary 151CHAPTER 8 Evaluating Small-Cap Managers 153Institutional Due Diligence Teams 153Assessing Manager Risk 155Assessing Investment Philosophy 158Analyzing a Manager’s Process 159Evaluating Firm Principals 167Assessing Manager Operations 169Contributions and Withdrawals 172Chapter Summary 174Final Thoughts 175Notes 177About the Author 183Index 185

BRIAN T. BARES, CFA, is a research analyst with Bares Capital Management, Inc. He founded the firm in 2000 with the belief that concentrated portfolios of inefficiently priced small companies could lead to high relative compounding. His firm manages the institutional portfolios of small-cap and micro-cap common stocks in long-only, replicated separate accounts. Mr. Bares began his career by working his way up from the bottom. From compliance and operations, to trading and portfolio management, he garnered experience in nearly all aspects of running a boutique small-cap management company before starting his own company. He graduated from the University of Nebraska with a degree in mathematics. His investment philosophy and strategy have been profiled in Value Investor Insight and the Manual of Ideas: Portfolio Manager's Review. Mr. Bares holds the Chartered Financial Analyst designation and is a member of the CFA Society of Austin. He resides in Austin, Texas, with his wife and two sons.

• Introduction xiiiAcknowledgments xviiCHAPTER 1 The Small-Cap Advantage 1Two Sources of Outperformance 1Small-Cap Definitions 2The Outperformance of Small-Cap Stocks 10Outperformance within the Small-Cap Space 15Chapter Summary 19CHAPTER 2 Small-Cap Disadvantages 21Research 21Trading 23The Small-Cap Graveyard and Reverse Survivorship Bias 28Capping Assets 29Chapter Summary 31CHAPTER 3 Small-Cap Investment Philosophy and Process 33Institutional Approach 33Passive and Enhanced Indexing in Small-Cap Stocks 34Active Management in Small-Cap Stocks 36Chapter Summary 70CHAPTER 4 Small-Cap Manager Organization 71Creating Value for the Manager 71Launching a Small-Cap Firm 72Investment Team 86Chapter Summary 94CHAPTER 5 The Fund-Raising Process 95General Marketing Strategy 95Institutional Clients 98Foundations and Endowments 104Consulting Firms 105Pension Plans 108High-Net-Worth Individuals 112Wrap Fee and Other Subadvisory Relationships 114Databases 115Third-Party Marketers 116The Chicken-and-Egg Problem 118Chapter Summary 119CHAPTER 6 Fees, Agency Issues, and Other Performance Drags 121Common Performance Drags 121Frictional Costs in Small Caps 124Institution-Manager Agency Issues 129Agency Issues in Trading 131Benchmark Tyranny 133Commingled and Separate Accounts 134Chapter Summary 138CHAPTER 7 Small-Cap Managers and the Endowment Model 139The Endowment-Model Approach to Small Caps 139Finding an Edge 142Funding Smaller Managers 145Funding Emerging Managers 147Finding Emerging Managers 149Chapter Summary 151CHAPTER 8 Evaluating Small-Cap Managers 153Institutional Due Diligence Teams 153Assessing Manager Risk 155Assessing Investment Philosophy 158Analyzing a Manager’s Process 159Evaluating Firm Principals 167Assessing Manager Operations 169Contributions and Withdrawals 172Chapter Summary 174Final Thoughts 175Notes 177About the Author 183Index 185