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Let's Talk About: Simple Investments

My comment, well known to the board, is why don't we just own the Market (the S&P 500 in this case), and this becomes a 5 minute meeting.

I'm not one for long meetings, so to make a 10 minute meeting into a 5 minute one is something of a goal. I sit on the board of a foundation, and SEI, one of the most respected managers of non-profits, makes an hour long presentation on how the fund preformed in a variety of investments (Large Cap, Small Cap, Volatility, etc.) They compare how they did relative to the benchmarks, and typically they are pretty close. The end of the presentation is usually, "The market was up X, we were up X minus something", or typically we were up 10% and the market was up 14%.

My comment, well known to the board, is why don't we just own the Market (the S&P 500 in this case), and this becomes a 5 minute meeting.

It seems very simple, but the rationale is more involved. When you own the S&P 500, you own a variety of investments. Do you own International Stocks, yes; do you own Emerging Markets? Yes; Do you own Small Cap Stocks? Yes.

Small Caps in a large cap index, 100%. Take for example Facebook, a company largely disliked by the investment community as it is poorly managed. Facebook made a 1 Billion Dollar investment in Instagram about 6 years ago. Today Instagram has a valuation of 100 Billion. So by owning the S&P 500, you own FB and you own the ability of FB (who knows their space better than anyone) to purchase smaller companies, that create more value. THERE IS NO SMALL CAP MGR THAT CAN MATCH THOSE RETURNS. Basically, each component company is running their business, and the majority of them are acquirers of businesses. They buy businesses that are synergistic meaning the combined value is greater than the purchase price of the acquired company. The companies of the S&P 500 are in a better position to understand and execute on value than a typical fund manager.

There is a lot of noise that the S&P 500 is over-weighted to tech, or under-weighted in banks. There are managers that may have a run better than the market, but at max its 10 years. Peter Lynch is my favorite, his run lasted about 8 years at Magellan. Absent coming up with another Peter Lynch, and the time frame he invested in, stick with the S&P.


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