One of the biggest lies ever told is that all you have to do to be a successful investors to buy big-name Wall Street stocks and sit on them for years. “Nothing could be further from the truth,” says Greg Guenthner in Penny Sleuth. In fact, through August 2008 the S&P 500’s annualized ten-year gain was just 4.7%. After taxes, commissions and inflation are taken into account, you’d be lucky to be breaking even. Investing in small caps, says Greg, is a much better way to profit…

More from Greg:

First, it’s important for you to know that the easiest way to make money in the stock market is by investing in penny stocks. And there are cold, hard facts to back up this claim.

The smallest stocks on the market - those with market capitalizations of less than $1.5 billion - have dominated the market recently, outpacing the large caps by a large margin so far this decade. But what many investors may not realize is that this is not a fluke. Historically, smaller stocks have always led the market.

A famous study conducted by Ibbotson Associates in the 1990s found that these small stocks outperformed all other stocks 56% of the time between 1926 to 1996 - including the blue chip stocks that get all of the media’s attention. The average return in any given year was 14% for small stocks. It was just 9% for large stocks. And the longer you held your small stocks, the better off you were.

Since 1926, there has never been a period of 25 years or more in which investing in large-cap stocks have proven to be more lucrative than investing in small-cap ones. Of course, there are many reasons for these great small-cap returns.

First of all, there are a lot more small-cap companies on the market. About two-thirds of all the companies on Wall Street have a market cap of $1.5 billion or less. So as a penny stock investor, you have a much wider universe in which to find moneymaking opportunities.

And because there are so many small companies, the major brokerage firms and institutions don’t have enough analysts to cover them all. So they simply ignore some of the fastest-growing companies on Earth. As a result, you can buy into some tremendous businesses trading for virtually nothing.

Smaller companies can also adapt to the changing marketplace and react quicker than their large-cap peers. Think about it this way: It’s a lot easier for a $200 million company to double than it is for a $255 billion company to do the same.

Source: The Truth About Wall Street