Hi guys,
I spent last couple weeks browsing through S&P 500,
400 and 600 guides. Here's a divine revelation I got:
S&P 500 is outperforming everything else for a good
reason. :-)))) But before you run and buy Vanguard 500,
or before you dismiss me as another indexer convert,
hear my reasoning.
S&P 500 has tons of Buffett ROE companies.
I mean it has probably 5 times more such companies
than S&P 400 and S&P 600. And I even did not
count any financial companies! If that's not
reason enough to buy S&P 500, even lots of companies
that don't have Buffett's ROE are attractive - talk
about BA, CB, etc.
S&P 500 also has enormous number of
financial companies. Again the ratio to S&P 400 and
S&P 600 is probably 10:1. This indicator, however,
does not mean that buying S&P 500 is a great idea.
Financials had great times after the S&L crisis.
Also - correct me if I'm wrong - the current inflation,
interest rate and bull market environment heavily
favors financial companies.
I'll make couple points here. First, I think
that S&P 500 is the ultimate benchmark. If you don't
outperform S&P 500, go for Vanguard index fund.
I would prefer to have an index analogous to S&P 500
but with less concentration of financials. It's quite
possible to outperform the current S&P 500 if
financials tank. On the other hand, Russell 2000,
Vanguard Extended Market Portfolio, Vanguard Total
Market Portfolio, and so on are junk, not worthwhile
following and comparing to.
This analysis is heavily influenced by
Buffett company selection and buy-and-hold approach.
It's quite possible to do another analysis and show
that S&P 500 is a worthless index, e.g. by starting
with sales growth and comparing it with
Internet X00. :-)))
So when Mike says that "small caps will
outperform again", I wonder whether he looks just
from historical perspective, or whether he implies
that small caps have other characteristics
(e.g. sales growth) that make them more attractive
than S&P 500.
Finally, the ultimate feat is to buy
S&P 600 company that gets into S&P 500. But you knew
that all along... :-)))
Just food for thought.
I'll repost this on the "Value investing"
thread to rekindle Mike's debate with Paul Senior. :-)
Good luck
Jurgis |
