John Authers

Just a brief post to pass on a thing of beauty. Critics of market-capitalisation weighting for indices always complain that you are in effect always buying the companies that are most overvalued. There is a lot of truth in this.

In the chart, Ned Davis Research create an index with just one stock in it: the biggest by market value at the time. As soon as a company is overtaken it is replaced in the index of one by the new leader. Trivia devotees may like to know that there have only been nine such stocks in the last four decades: Apple; AT&T (though not in its present incarnation); Altria (once known as Philip Morris); Cisco Systems (beneficiary or victim of the most absurd episode of equity overvaluation in history); ExxonMobil; General Electric; IBM; Microsoft; and Wal-Mart. All are undeniably great companies that at some point since 1972 the market thought to be worth more than any other. Here is how these companies performed compared to the S&P 500, starting in 1972: 

Just like Apple, companies are beating their low-balled earnings expectations, investors are lapping up equities but the growth outlook remains gloomy. James Mackintosh, investment editor, says eliminating extreme risks makes the lesser ones more palatable – for now.