Hammering Out Illusions
I’ve been in the financial services industry for 51 years now – the first three attempting to inject a sense of humour into the actuarial profession, and another year thereafter trying to bring insurance company training systems into the 20th century.
But to me these places all seemed like they were for people who wished they were somewhere else.
So, I followed that logic and became an IFA instead back in 1973, just in time for a stock market crash that saw the UK FTSE All -Share Index fall 72% over 15 months.
Lucky white heather, eh?
Yet somehow, we all managed to survive!
And that’s despite generations of pessimists confidently expecting crashes almost every year while employing all manner of complicated statistics and theories to compare whatever was happening at the time to some dark spot in history.
Always on the basis that history repeats itself.
Well, if that’s true whatever happened to the second Battle of Bannockburn?
How often do we see these types of connections drawn between “some event happening now” in an index like the S&P 500 compared to “some bad event from way back when”?
Or how some “indicators” today are the same as some “indicators” were back in 2000, just before the Dot.Com crash, Great Recession of 2008/09, or even the Great Depression of the 1930s?
And those relationships are always deemed to somehow “prove” today’s numbers are either way too high, too volatile, or too rigid – which always means the whole damn thing is on fire and whistling fast towards the ground.
The charts and graphs that sit alongside these assumptions are all then conveniently forgotten when predictions fail to coincide with reality.
Selective amnesia, I think it’s called.
Hammering Out Illusions?
But Indexes the S&P 500, just like the FTSE 100, are not monolithic unchanging things.
They’re made up of the perceived values of businesses that are currently in favour amongst investors, balanced by yesterday’s businesses that have fallen out of favour.
And that’s not the only thing that’s constantly changing.
In 2000, the biggest company in the S&P 500 was General Electric with a value of $474 billion, Pfizer was third at $290 billion, and Microsoft was the seventh largest at $231 billion.
But if you look at that same Index today, Microsoft and Walmart are all that remain of the former top 10. For example, Microsoft is now the second largest company in the S&P 500 at six times its previous value and representing 5% of the entire index.
In fact, today’s S&P 500 top 10 is dominated by tech companies, with Apple, Microsoft, and Amazon all above $1 trillion in value, while companies like Pfizer (that ranked 3rd largest back in 2000) is now nowhere near the top 10 - worth 27% less than it was 20 years ago.
Oh, and while they call the Index the S&P 500, it actually contains 505 listed companies (for some unknown reason), where on average about 20 businesses are swapped in and out each year.
All these changes and unrealistic comparisons remind me of the story about an old joiner who, upon retiring after 50 years in the trade, was interviewed by a local newspaper.
The reporter asked, “Jimmy, you must have seen big changes over the years?”
“Oh, aye” Jimmy replied. “For example, they don’t make tools that last the way they used to. See this hammer?” he said, pointing to his old tool belt. “I’ve had it for all of my 50 years in the trade!”
He then paused for a moment and said, “Mind you, it’s had three shafts and three heads replaced in that time!”
So, the next time you hear an Index described as if it were the same now as it was at some time in the past, remember they’re as dissimilar and illusionary as the hammers that Jimmy started and ended his career with.
Maybe better to stick with finding great businesses or the fund managers who are good at that instead.
Then just relax and put your hammer away.
And if you liked what you’ve read and want to have a chat about it do get in touch.