essays pieces of the puzzle
Friday, April 27th, 2012
a biblical battle

When it comes to stocks, the Goliaths have been getting beaten up by the Davids for years now.  The top panel in the chart shows the returns on the S&P 100 versus that of the S&P 600.  The bottom panel shows the woeful cumulative relative performance of the giant stocks that make up the 100.

They are a hundred times bigger on average in market cap than the stocks in the S&P 600, and it seems like they are aggregating both economic power and political power.  But investors could care less.

The big underperformance came early in the period shown, as the large stocks retreated from a historic level of overvaluation.  As a result, small beat large and equal-weighted indexes beat market-weighted ones — and investors fell out of love with the mega stocks that they had swooned over in the 1990s.

I didn’t calculate the effect, but imagine how much worse it would be if Apple’s contribution was taken out of the S&P 100.  Since it was added on May 31, 2007, it is up in excess of 400% and now represents seven percent of the index value.

Should you want to bet on one side or another in this battle, iShares has ETFs for the 100 (OEF) and the 600 (IJR).  (Chart:  Bloomberg terminal.)

to infinity and beyond

Speaking of Apple, the latest dispatch on the research puzzle deals with the investment process issues that arise when a stock dominates the attention of asset managers.  To quote:  “Every decision is magnified, every emotion is amplified.  It can all become more behavioral than analytical.”  The stock may go to infinity and beyond or it may fade away, but the decision matrix for it right now is different than for everything else.