Opinion: I dissected the S&P 500, and this is what I found
Published: May 10, 2016 8:04 a.m. ET
Many of us learned the word “dissection” when we examined a frog in grade school. Today, part of my strategic investment process is dissecting the stock market in hopes of gleaning some clues that lead to new opportunities or red flags that help avoid trouble.
Recently, I strolled into my investment lab (OK, it's just my desk), donned my safety goggles and sought insight from the current musculoskeletal system of my favorite amphibian, the stock market.
Here's what I found when I looked inside the S&P 500 SPX, -0.31% (note that according to my source, there were 501 companies in the index. This happens sometimes due to mergers and such):
Percent of S&P 500’s market capitalization Number of companies Number of companies in this segment
10% 3 3
20% 10 7
30% 19 9
40% 32 13
50% 50 18
60% 79 29
70% 122 43
80% 189 67
90% 290 101
100% 501 211
Source: Finviz.com, as of May 4
Dissection
When we sort the S&P 500 by market capitalization from largest to smallest, we find that only three stocks (Microsoft Corp. MSFT, -0.33% Apple Inc. AAPL, -0.31% and Google parent Alphabet Inc. GOOG, -1.01% GOOGL, -0.95% ) comprise 10% of the index's total value. You’ve heard of “FANG” stocks? I’m going to call these MAG. And I’m also going to call them a sign of a dangerously narrow stock market. More on that later.
To get from the top 10% by market capitalization to the top 20%, you only need to add seven more stocks to the mix. They are Exxon Mobil Corp. XOM, -0.65% Berkshire Hathaway Inc. BRK.A, -1.18% BRK.B, -1.17% Facebook Inc. FB, -0.95% Johnson & Johnson JNJ, +0.25% Amazon.com Inc. AMZN, -0.58% General Electric Co. GE, -0.45% and Wells Fargo & Co. WFC, -1.26% Those seven plus MAG (10 stocks in all) comprise just over one-fifth of the S&P 500’s value.
Remember, the S&P 500 is a capitalization-weighted index. As I am showing you, most of the stocks don't influence the index's price movement unless their prices rocket higher versus the rest of the index, which increases their market capitalization. But by that time, they may be getting seriously overvalued.
Continuing on, add just nine more companies to reach 19, and you account for 30% of the S&P 500's value. Another 13 companies gets you to 40% and 18 more gets you halfway home. That's right, 50% of the index of 500 stocks is made up of a mere 50 companies.
And to emphasize further how lopsided the index has become, look at the bottom of the chart. The bottom 30% of the index's weight is spread across 379 companies! We have the 80/20 rule that applies to many areas of business and life. This is the 75/30 rule: 75% of the S&P 500 members only make up 30% of the index.
Implications:
1. The S&P 500 isn’t what many investors think it is. This wouldn’t be a problem, except that so much money has flooded into it via index funds that track it. I suspect many will be surprised to find that they aren’t as diversified as they think. Now, these are prominent businesses, but they are also in many cases the hottest price movers. A big part of indexing is buying yesterday's winners. And yes, you can index in a way that equally weights the 500 stocks, but that accounts for a very small percentage of what investors actually do.
2. A small number of tech stocks has way too much influence. Five of the eight largest companies focus on technology and the Internet. Remember the year 2000? I don't believe today’s market is a carbon copy of the dot-com bubble, but I do think the risks to today’s unhedged, index-hugging investors are similar. As opposed to 16 years ago, money in index funds is a dominant part of the investing landscape. To me, it indicates too much money is chasing the same group of stocks. That can work until it doesn’t. Just ask hedge-fund managers who get burned by being in “crowded trades.”
I am a concentrated investor by nature; my hedged portfolios typically contain about 20-25 stocks. But they aren’t all of the very largest companies, and I usually equal-weight them. It isn’t the individual companies that make up the largest 50 stocks that’s the problem, it’s the fact that those 50 stocks are too popular as a group.
3. Investors don't know what can hurt them...until it does. This S&P 500 issue is one that has occurred in the past. I think that in the not-too-distant future, investors will remember that megacap investing via indexes, in a buy-and-hold fashion, can destroy wealth just as easily and quickly as buying penny stocks can. This issue of concentration isn’t a new problem, but it is a problem.
Remember the smell of that formaldehyde liquid when you dissected that frog? Turns out it not only smells horrible, but it’s toxic too. Don't let that describe your portfolio when the conditions mentioned above correct themselves. |
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发表于 2016-10-13 09:44 PM
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发表于 2016-10-13 11:23 PM
