Update: 12/7/20

In News by admin

Chart Crimes and misdemeanors

Social representation

If you are on social media, you may well recognize this screen shot (see inset) of a post of a chart that purports to show the extreme dominance of just a few large cap technology companies within the S&P 500 Index.  Even to people who are familiar with cap weighted indexes, the chart’s appearance is stunning. It’s a pie chart, and the six largest slices make up fully half of what should be a 500-slice pie. In other words, 6 companies (Apple, Microsoft, Amazon, Google, Facebook and Tesla) seem to comprise half of the S&P 500 index.

The first problem: Tesla is not yet in the index. It will be in a couple of weeks, and when it does it will likely come in as the 6th largest component, but it’s not in there yet.  However, this is just a misdemeanor. A yellow card. Not the big one.

The felony of this chart is that the author included the top 6 stocks and the bottom 369 but omitted the 7th through 131st largest companies in the index. If you include all the companies in the index, the picture is far different – the top 6 stocks (pre- Tesla) represent only about 20% of the index.  Still a lot no doubt, but a far cry from ~50%.

Six biggest stocks

Ironically, the dominance of large technology companies DOES exist in the pandemic era, and might have made a similarly compelling chart, albeit in a more honest way. The year to date returns (see below) of S&P 500 companies for 2020 are skewed perhaps even more than their cap weighted contributions.  So far this year, the top 9 or 10 companies in the index have generated half of all the gains of the S&P 500 for 2020. This should come as no surprise to those who recall that while Apple recovered from the pandemic plunge in just a few months, and the S&P 500 was hitting new highs in August, smaller companies, such as those of the Russell 2000, didn’t recover to pre-pandemic levels until November, and many smaller companies still have not (and perhaps will not) recover. 

Take home message, be careful of what you read.  Accurate news, like smart, conservative investing can be boring, so sometimes people try to spice it up.

“Investing should be more like watching paint dry or watching grass grow.
If you want excitement, take $800 and go to Las Vegas.”

-Paul Samuelson


Jim, Mark, and Dave

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