Which would you rather own: AAPL or S&P 600 Small Cap Index?

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selters
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Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by selters »

If you had to choose, which equity exposure would you rather have, 100% Apple stock or 100% S&P 600 small cap index? I'm wondering, since they have approximately the same market cap. Apple is worth $803 billion and the combined value of the constituents in the S&P 600 is $780 billion. Total stock market index fund folks keep telling me that total stock market is as diversified as it gets and that any deviation from the total stock market index concentrates risk and does not increase diversification. In fact, according to these people AAPL is more diversified, since it is worth more than the S&P 600 index constituents combined.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by oldcomputerguy »

selters wrote: Sat Oct 14, 2017 1:16 pm If you had to choose, which equity exposure would you rather have, 100% Apple stock or 100% S&P 600 small cap index? I'm wondering, since they have approximately the same market cap. Apple is worth $803 billion and the combined value of the constituents in the S&P 600 is $780 billion. Total stock market index fund folks keep telling me that total stock market is as diversified as it gets and that any deviation from the total stock market index concentrates risk and does not increase diversification. In fact, according to these people AAPL is more diversified, since it is worth more than the S&P 600 index constituents combined.
You apparently are very confused as to the definition of “diversification”. One company is never more diversified than six hundred.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by nisiprius »

The Vanguard Small Cap Index Fund, NAESX, goes back farther than VIOO, the Vanguard S&P Small-cap 600 index fund. Quick checking, the two have tracked together fairly closely over the life of VIOO and I want to go back far enough to include some of Apple's bad times as well as their good times. NAESX wasn't always an index fund... so this is sort of a messy comparison but I think it makes a valid point.

On this incredibly compressed scale, I think it is very clear that although Apple has certainly outperformed NAESX, it has equally certainly experienced much more volatility and/or "risk" in general, and that even though small caps in themselves have been relatively volatile and higher-risk than the market as a whole, they have been much less volatile as a group than AAPL has. In short, common sense says that a small-cap index fund is more diversified than a single stock, and the chart shows that it has been much less volatile than a single stock.

If two investors started at the same time, in 1997 the NAESX investor would have had six times as much as the AAPL investor. But at this point, the AAPL investor would have over ten times as much as the NAESX investor.

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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by ROIGuy »

It all depends when you bought in. If I could go back to 1996...AAPL all the way!
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by lack_ey »

There are a number of different ways that people think about diversification. Under some of these, with a number of assumptions it follows that the total market is more diversified than subsets or reweightings of the total market. Under others, that's not necessarily the case.

But the reasons for the market being more diversified have to do with more than just the total amount of market cap that is represented.

One company like Apple represents one business rather than the hundreds in the S&P 600, even if the total valuation is similar. With just Apple you don't have diversification across products, much less sectors. Apple's value is dominated by the huge sales and profitability of the iPhone line. Furthermore, with one stock this is just a single ticker symbol, one variable. Though any given mega cap is typically safer, broader, and more diversified than a given small cap, an index as broad as the S&P 600 constitutes a range of businesses that in the aggregate in many perspectives should be safer and better. And if there is any small cap premium at all in the long run, it may have a higher return as well. So for many reasons it would be my pick as an investment in a vacuum.

In the past 10 years, the S&P 600 has had a little less than 2/3 of the volatility of Apple (by standard deviation), for one simple measure. Going back further the difference was larger, but obviously nowadays Apple is super huge.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by JoMoney »

I think it's a reasonable question/comparison. There are different ways to mitigate risk, diversification is one way, but it's not unreasonable to believe someone could rationally go through the financial situation of a handful of companies and pick out a few that have substantially lower risk than a hodgepodge of others. A bigger question though, is will the lower risk stocks be priced to have lower returns (as the bonds of lower risk companies are)? Trying to sort through the noise and complexity and pick out what I think might have lower risk with higher returns is a more difficult proposition, I'll just take what the market decides is a broad average of the risk/return.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by rkhusky »

Dollar value or market cap does not correspond to diversification. Diversification refers to owning different types of companies of different sizes making different products with different risks in different parts of the world. Apple is more diversified than a company that makes a single product. Berkshire Hathaway or Procter and Gamble are more diversified than Apple.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by Dottie57 »

As aformer owner of apple in individual stocks, I say go with the index.

Apple stock price is subject to rampant speculation. Even when meeting it's quarterly goals and those of Wall Street the price has gone down. Why? Because speculation fed by rumour sites feed into expectations which are wildly out of sync with reality. I decided holding Apple outside of mutual funds was driving me nuts. I am happier after having sold.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by lazyday »

I'd hookup with Apple, kill the S&P 600, and marry the 780 billion.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by itstoomuch »

Depends.😎
I own individual stocks in Discretionary. Lost twice in aapl in their weak times in late 1990s and early 2000s.
I personally do not like their model as being too diversived thus I focus on single purpose companies.
I have sml caps mf/index in other financial products 🤔
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by arcticpineapplecorp. »

Four things:

1. Apple is a large company whereas small cap index is comprised of small companies by definition. So why compare whether I want apples or oranges (pun intended)

2. it's risk adjusted returns that matter. So even if AAPL outperformed something else (your benchmark is not consistent as stated above) so what? If you took 100 times the risk did you get 100 times the return? Usually not. The return of single stocks generally isn't enough to compensate for the extra risk you took. Which is why it's not wise to gamble with individual stocks. You're taking uncompensated risk generally speaking.

3. If AAPL grew 100 times or whatever, do you think it will continue to grow 100 times from where it's currently at? What do you think is more likely: AAPL goes from $803 billion to $1.6 Trillion or a small cap company worth $1.5 billion (average market cap: https://personal.vanguard.com/us/funds/ ... IntExt=INT) goes to $3 billion?

4. The past is not prologue. Just because AAPL might have been a better performer than S&P600 doesn't mean it will do that in the future. The bigger they are the harder they fall.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by Alexa9 »

Apple is not too big to fail. Although Bogleheads are obsessed with Total Market Indexes, the Small Cap Index is perfectly diversified as well. Once you get above ~25 stocks, the standard deviation is "good enough."
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by nedsaid »

oldcomputerguy wrote: Sat Oct 14, 2017 1:24 pm
selters wrote: Sat Oct 14, 2017 1:16 pm If you had to choose, which equity exposure would you rather have, 100% Apple stock or 100% S&P 600 small cap index? I'm wondering, since they have approximately the same market cap. Apple is worth $803 billion and the combined value of the constituents in the S&P 600 is $780 billion. Total stock market index fund folks keep telling me that total stock market is as diversified as it gets and that any deviation from the total stock market index concentrates risk and does not increase diversification. In fact, according to these people AAPL is more diversified, since it is worth more than the S&P 600 index constituents combined.
You apparently are very confused as to the definition of “diversification”. One company is never more diversified than six hundred.
My thoughts too. I own the S&P 600 Small Cap Index in ETF form and have been very pleased with it as an investment.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by selters »

The reason I'm asking is that every now and then the question comes up, is market cap weighting the best way to invest? Isn't it too concentrated in its top holdings? And then we get the usual string of replies, like market cap weighting is the most diversified, market cap weighting is on the efficient frontier. Then someone asks, what about the the very top heavy markets, like Denmark, South Korea or Spain, where the top one, two or three index constituents make up sixty or seventy percent of the index? Someone replied to me and said that market cap weighting is still the most diversified way to invest in that market. So I'm thinking, why not just take it one step further? If market cap is a good indicator of diversification, then surely Apple is more diversified than the S&P 600? I don't believe this myself, by the way; I'm just trying to follow the logic of those who reject anything but market cap weighting.

So where do we draw the line? Would you hold the top 10 us stocks or the bottom 1000? The top 100 or the bottom 2000? If a higher number of stocks provide more diversification than their combined market cap would indicate, then one should overweight small and mid caps, I'd say.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by aqan »

oldcomputerguy wrote: Sat Oct 14, 2017 1:24 pm
selters wrote: Sat Oct 14, 2017 1:16 pm If you had to choose, which equity exposure would you rather have, 100% Apple stock or 100% S&P 600 small cap index? I'm wondering, since they have approximately the same market cap. Apple is worth $803 billion and the combined value of the constituents in the S&P 600 is $780 billion. Total stock market index fund folks keep telling me that total stock market is as diversified as it gets and that any deviation from the total stock market index concentrates risk and does not increase diversification. In fact, according to these people AAPL is more diversified, since it is worth more than the S&P 600 index constituents combined.
You apparently are very confused as to the definition of “diversification”. One company is never more diversified than six hundred.
He's probably confusing it with gambling.
I hope you understand that you are comparing apples and oranges. These are not substitutes of each other
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by selters »

What if framed the question like this:

If you could only hold Apple and the bottom 1000 stocks in TSM, would you hold them at market weight?

If you could only hold the top five stocks in the US and the bottom 2000, would you hold them at market weight?

If you could only hold the top 50 stocks in the US and the bottom 2500, would you hold them at market weight?

If you could hold the top 500 stocks in the US and the bottom 3000, would you hold them at market weight.

Add as many questions as you like where the combined market cap of the group of large stocks matches the group of small stocks.

The last question is basically the same as "if you could only own the S&P 500 and the S&P Completion index, would you hold them at market weight?" Most Bogleheads say yes to that question, but I'm guessing they would not say yes to the first question. So where should one draw the line?
Last edited by selters on Sat Oct 14, 2017 4:24 pm, edited 1 time in total.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by avalpert »

selters wrote: Sat Oct 14, 2017 4:01 pm The reason I'm asking is that every now and then the question comes up, is market cap weighting the best way to invest? Isn't it too concentrated in its top holdings? And then we get the usual string of replies, like market cap weighting is the most diversified, market cap weighting is on the efficient frontier. Then someone asks, what about the the very top heavy markets, like Denmark, South Korea or Spain, where the top one, two or three index constituents make up sixty or seventy percent of the index? Someone replied to me and said that market cap weighting is still the most diversified way to invest in that market. So I'm thinking, why not just take it one step further? If market cap is a good indicator of diversification, then surely Apple is more diversified than the S&P 600?
That just doesn't follow logically - it is a non-sequitur. There is no connection between market-weighting across the entire market being diversified and random components of the market's relative diversification to one another (whatever that would mean).
So where do we draw the line? Would you hold the top 10 us stocks or the bottom 1000? The top 100 or the bottom 2000? If a higher number of stocks provide more diversification than their combined market cap would indicate, then one should overweight small and mid caps, I'd say.
This also is completely logically flawed. Diversification is a function of more than just the number of entities - 10 bank stocks are less diversified then 5 stocks from different sectors because of the undiversified sector risk you are exposed to, for example.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by Helo80 »

When AAPL was safely a small cap fund, I wonder if you made an investment of $10K in AAPL versus an individual investment of $10K in all 600 or so other small cap funds how many of said funds would be above and below having just maintained a small cap index fund investment of $10k.

Hindsight is always easy... hell, if we had moved our portfolios to bitcoins a few years ago, we would all be billionaires.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by nisiprius »

selters wrote: Sat Oct 14, 2017 4:18 pmWhat if framed the question like this: If you could only hold Apple and the bottom 1000 stocks in TSM, would you hold them at market weight?...
Wait, that's a different kind of question. I don't know how to answer that one.

If the entire stock market consisted of nothing but AAPL and the bottom 1,000 stocks in TSM, yes, I absolutely would hold them at market weight. And my reason would be the same as it is for the total stock market as it exists. Holding at market weight cancels out the effect of speculative trades by others, and removes the burden of deciding which side I want to be on in those speculative trades. It also ties in with some theorem in financial economics that I don't quite understand, in which the market portfolio is the mean-variance optimum.

If we have the stock market as it exists today, in which an investor who does not want to change their cash position can choose to sell AAPL without investing it in the bottom 1,000 stocks in TSM, then I don't know what my answer is. I don't feel like putting in the work to find out because it's not a situation of practical importance.

The rhetoric about cap-weighting being "concentrated" in the largest companies is sophistry. It is only "concentrated" in the largest companies if you have already adopted a view that your investment ought to be equally weighted by ticker symbol, and that it is "concentration" if you have more money in one ticker symbol than another.

This is like claiming that a bucket of sea water has "too high a concentration of water" because it is only 3.5% salt and 96.5% water.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by Nicolas »

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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by TropikThunder »

selters wrote: Sat Oct 14, 2017 4:18 pm If you could only hold the top five stocks in the US and the bottom 2000, would you hold them at market weight?
If you could only hold the top 50 stocks in the US and the bottom 2500, would you hold them at market weight?
If you could hold the top 500 stocks in the US and the bottom 3000, would you hold them at market weight.
What's your alternative? Equal weighted? At some point no theoretical advantage matters if it's not executable. There are equal-weighted S&P500 funds (RSP for example) but they have high turnover (bad in a taxable account) and relatively high cost vs market weight index funds (like SPY). Just as a matter of design, market-weighted funds have a built-in cost and tracking advantage since the fund rebalances itself as the market share of its constituents fluctuates, while an equal-weighted fund would have to constantly tinker with its holdings (if GM drops 5% since their next-gen batteries failed in development, the fund would have to buy more to get back to the 0.20% target). The compromise is either (a) tight tolerances around the 0.20% allocation target and high trading costs; or (b) wide tolerances around the 0.20% allocation target and poor tracking.

And even then, it's not what your proposing. There are no equal weight TSM funds (there's the S&P500 one, RSP, and a Russell 1000 one, EQAL). There certainly isn't a Russell 2000 one, or an S&P600 one (not that I could find anyway). So, regardless of whether your are on the right track or the wrong track here, it's not achievable in any sort of cost-efficient way since you'd have to do it yourself (i.e., manage a portfolio of 600-1000 stocks and maintain them all at equal weight).
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by asset_chaos »

selters wrote: Sat Oct 14, 2017 4:18 pm If you could only hold Apple and the bottom 1000 stocks in TSM, would you hold them at market weight?
Sounds like Finland when Nokia was well above half of total Finnish market cap. Should I find myself in such a situation, the answer for me would be to expand my thinking to the total global stock market and seek maximum diversification there.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by TropikThunder »

asset_chaos wrote: Sat Oct 14, 2017 5:18 pm
selters wrote: Sat Oct 14, 2017 4:18 pm If you could only hold Apple and the bottom 1000 stocks in TSM, would you hold them at market weight?
Sounds like Finland when Nokia was well above half of total Finnish market cap. Should I find myself in such a situation, the answer for me would be to expand my thinking to the total global stock market and seek maximum diversification there.
We should add that example to the pro-international list. :twisted: Seriously though, I think this is already part of the rationale for holding international stocks: different countries have different market-dominating sectors. [hopefully not side-tracking into the Int'l debate :| ]
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by whodidntante »

I don't have any direct AAPL exposure, nor do I want any. But I have a major small cap tilt including the S&P 600 index.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

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selters wrote: Sat Oct 14, 2017 1:16 pm In fact, according to these people AAPL is more diversified, since it is worth more than the S&P 600 index constituents combined.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by Johm221122 »

The most important reason I would rather own index is that the index will change with time,companies will either grow out of small cap index or fall from index but it will change with time and I hope to be investing another 50 years,were will Apple be in 50 years would be too much uncertainty(risk)
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by David Scubadiver »

Besides having your terminology confused, your hypothetical makes no sense since there is no circumstance in which one could possibly be so limited.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by Seasonal »

Which is more diversified: a basket of 200 stocks of small companies, all in the same line of business, or a massive conglomerate with 200 divisions, each in a different line of business?
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by Johm221122 »

Seasonal wrote: Sat Oct 14, 2017 6:12 pm Which is more diversified: a basket of 200 stocks of small companies, all in the same line of business, or a massive conglomerate with 200 divisions, each in a different line of business?
Definitely 200 small companies,one scandal in one corporation can bring down 200 divisions of one company
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by Nate79 »

This is really an Apples to Oranges comparison :D .
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by selters »

David Scubadiver wrote: Sat Oct 14, 2017 6:06 pm Besides having your terminology confused, your hypothetical makes no sense since there is no circumstance in which one could possibly be so limited.
We've seen worse 401k options many times on this very forum.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by David Scubadiver »

selters wrote: Sat Oct 14, 2017 6:32 pm
David Scubadiver wrote: Sat Oct 14, 2017 6:06 pm Besides having your terminology confused, your hypothetical makes no sense since there is no circumstance in which one could possibly be so limited.
We've seen worse 401k options many times on this very forum.
That is funny. But even the worst 401(k) that offered only two choices, would still allow you to invest in both.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by nisiprius »

Johm221122 wrote: Sat Oct 14, 2017 6:20 pm
Seasonal wrote: Sat Oct 14, 2017 6:12 pm Which is more diversified: a basket of 200 stocks of small companies, all in the same line of business, or a massive conglomerate with 200 divisions, each in a different line of business?
Definitely 200 small companies,one scandal in one corporation can bring down 200 divisions of one company
Although it was not quite as extreme as 200 divisions, GE provides an illustration of a time when the stock of one corporation that is in many different businesses turned out not to be as diversified as owning the stocks of many different companies that are in different businesses.

NAESX, Vanguard small-cap index fund, blue. Lost 55% during 2008-2009. Made it back by 2012.
GE, orange. Lost 79% during 2008-2009. Still not back to even.

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I would love to investigate some other representatives of the great conglomerates of the sixties, such as Ling-Temco-Vought, Litton Industries, TRW, Gulf + Western... but I can't think offhand of any that still exist, can you?
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by StevieG72 »

S&P 600

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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by avalpert »

StevieG72 wrote: Sat Oct 14, 2017 6:54 pm S&P 600

Hindsight is 20/20, chasing performance is a good way to lose money.
Choosing between AAPL vs. S&P 600 because of a misguided understanding of what diversification is has nothing to do with performance chasing.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by Northern Flicker »

Holding just AAPL would be taking substantial security-specific and sector risk which will be uncompensated because they can be diversified. Market capitalization is not synonymous with diversification.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by adamthesmythe »

> AAPL is more diversified, since it is worth more than the S&P 600 index constituents combined

Apple has a countably small number of products that account for most of its sales (and a smaller number that account for most of its profits). A single problem with a flagship product could cause massive financial consequences. This is the very opposite of diversification.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by venkman »

selters wrote: Sat Oct 14, 2017 4:01 pm The reason I'm asking is that every now and then the question comes up, is market cap weighting the best way to invest? Isn't it too concentrated in its top holdings?
The way I look at it, the main reason for investing in stocks is so one can participate in corporate earnings. The market cap weighting of the TSM is the most efficient way to do that. Presumably, AAPL makes up 3% of the TSM because its current earnings, plus the market's guess about its expected future earnings, work out to 3% of the TSM's total earnings. And the combined current/future earnings of the S&P 600 companies happen to add up to the same 3%. As current earnings and future estimates change, market cap weightings change along with them; so at any given time, the market weighting of the TSM is the best guess of the long-term earnings of all the companies in the index.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by Longtermgrowth »

I would be comfortable with 100% of my US equities in an S&P 600 Value ETF. I would not be comfortable with more than 5% of my US equity holdings in AAPL.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by lazyday »

selters wrote: Sat Oct 14, 2017 4:01 pmThen someone asks, what about the the very top heavy markets, like Denmark, South Korea or Spain, where the top one, two or three index constituents make up sixty or seventy percent of the index? Someone replied to me and said that market cap weighting is still the most diversified way to invest in that market.
If they said that, they are wrong.

Looking at Vanguard's ex-US index fund holdings for Belgium:

Code: Select all

                           Market Value ($000)    
Anheuser-Busch InBev SA/NV        1,030,223     
Belgium—Other                     1,065,159          
If that's representative of actual market weight in Belgium, then nearly half the market is in one stock. If half your assets were in one stock, you are clearly not well diversified. Much of your return is dependant on a single company's fortunes.

We might argue if it's best for a Belgian to market weight, but it is clear that market weight is not the most diversified.

I suppose this is true for a US investor too. Cutting back from market weighting Apple would increase diversification, though probably not by enough to matter.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by IowaFarmBoy »

How would you determine the "bottom" stocks? Do you mean the smallest or the ones that are somehow judged to be the most likely to perform poorly? If the market is efficient, you can't determine the underperformers in advance since they should all be fairly priced based on what we know at that time. In hindsight, there will be winners and losers but we can't know which ones will be which in advance.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by sambb »

i owned aapl for a long time - made a ton of money and paid off my mortgage. so glad i didnt go into an index fund. what a great ride.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by Johm221122 »

IowaFarmBoy wrote: Sun Oct 15, 2017 5:54 am How would you determine the "bottom" stocks? Do you mean the smallest or the ones that are somehow judged to be the most likely to perform poorly? If the market is efficient, you can't determine the underperformers in advance since they should all be fairly priced based on what we know at that time. In hindsight, there will be winners and losers but we can't know which ones will be which in advance.
Yes,there referring to the lowest market value
The top stocks in index are heavily weighed,if you just used bottom stocks it would be more diversified

Or in the case of
selter wrote
Apple and the bottom1000 stocks
"Apple would completely dominate that "index""(by market value)
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by nisiprius »

So, serious question--I did some cursory searches once without success. Can anyone come up with an accepted definition of the word "diversification" along with an accepted numerical measure of it, so that we could apply it and find out what represents maximum diversification by that measure?

A key question which I've seen argued cogently both way--but so far not with anything very illuminating. Are there weightings more diversified than the market itself? By what measure? I'm thinking of factor-based portfolios here, but an easier thought experiment, and one that is sometimes seriously suggested as a real-world portfolio, is an equal weighting of the eleven GICS headline sectors. If we do this, what exactly are we expect to achieve other than "higher performance?" Higher risk-adjusted return as measured by the Sharpe ratio? In backtesting with PortfolioVisualizer, a portfolio of the eleven Vanguard sector ETFs in equal weight indeed had a Sharpe ratio of 0.64, compared to 0.59 for the 500 Index fund (data here), but is this just the luck of the draw of the time period, or is there some measure of diversification that would give us a rational expectation of higher Sharpe ratio over the long run?

It should be noted that there is one definition. According to the Investment Company Act of 1940, as summarized here, one of the regulatory requirements for mutual funds is that
Mutual funds must declare themselves to be “diversified” or “non-diversified.” Generally, a diversified fund is required to invest more than 75% of the value of its total assets in cash and cash items (including receivables), government securities, securities of other registered investment companies, and other securities that are limited in respect of any one issuer to an amount not greater in value than 5% of the value of the total assets of the fund and to not more than 10% of the outstanding voting securities of the issuer. (Section 5(b) of the 1940 Act.)
Apple is currently about 3% of the total market, so if it were to double in size I guess Vanguard would have to declare that the Total Stock Market and 500 Index funds were "non-diversified!"
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by grabiner »

nisiprius wrote: Sun Oct 15, 2017 8:52 am It should be noted that there is one definition. According to the Investment Company Act of 1940, as summarized here, one of the regulatory requirements for mutual funds is that
Mutual funds must declare themselves to be “diversified” or “non-diversified.” Generally, a diversified fund is required to invest more than 75% of the value of its total assets in cash and cash items (including receivables), government securities, securities of other registered investment companies, and other securities that are limited in respect of any one issuer to an amount not greater in value than 5% of the value of the total assets of the fund and to not more than 10% of the outstanding voting securities of the issuer. (Section 5(b) of the 1940 Act.)
Apple is currently about 3% of the total market, so if it were to double in size I guess Vanguard would have to declare that the Total Stock Market and 500 Index funds were "non-diversified!"
Note the "75% of the value" in the definition. The fund can invest 25% of its value in assets which are more than 5% of the fund and still call itself diversified.

But this can be an issue. At one point in the Internet boom, Vanguard had to declare Growth Index to be non-diversified, because the top four holdings were 26% of the fund.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by arcticpineapplecorp. »

sambb wrote: Sun Oct 15, 2017 6:00 am i owned aapl for a long time - made a ton of money and paid off my mortgage. so glad i didnt go into an index fund. what a great ride.
Never confuse outcome with strategy.

Just because the outcome was good, doesn't mean the strategy was.

Also, I'm assuming in order to have paid off the mortgage with AAPL that means you had to SELL some or all of the stock because AAPL only started paying dividends in 2012. Before that they didn't pay dividends since 1995 (source: https://www.google.com/search?q=when+di ... 8&oe=utf-8) . When did you do sell the AAPL stock? And if you did that in the past and then AAPL continued to go up even more, then didn't you leave money on the table?

A great ride? Well that depends on when you invested in AAPL, now doesn't it? Instead of comparing it to the small cap index let's compare it to "the market". Now the total US stock market index fund with Vanguard only started in 1992 so let's use the S&P500 since it goes back to Apple's inception. Yes, you can argue AAPL wasn't a large cap stock (like the S&P500 contains) when AAPL started but the point of this thread is about diversification. And it's just as disingenuous to compare AAPL (as it is now, the largest company) to a small cap index fund as it would be to compare the S&P500 to AAPL (as it was when it was a small company). But most will agree the S&P500 closely represents "the market" (U.S. only anyway).

That being said what does the pretty picture below tell us (the blue line is S&P500 index and orange line is AAPL)? Sure you can look from front to back and say AAPL made 7.5 times as much as the S&P500. But that's only the case if you invested from 12/12/80 to present. How many people do you think actually did that? Even you admit your stock paid the mortgage, so you had to sell some of it, right? Which means even you didn't hold the entire time.

What else do we see? AAPL did pretty poorly compared to the S&P500 index fund until 9/30/06 when it finally pulled ahead of the S&P500 and never looked back...so far (We've already established the bigger they are the harder they fall). So someone would have been losing to the S&P500 for 25 years. Would you really have held on to something that underperformed the S&P500 for 25 years? At greater risk? Of course not.

The growth of AAPL essentially has occurred from 9/30/06 to present. Basically just the last 11 years. So was AAPL really a great stock all along or was it just great in the recent past? I think we can see the answer to that.

Finally, remember that the risk was far greater with AAPL than the S&P500 (the market). Again, the point we're trying to make here is that diversification means less risk. Look at the blue line. A pretty even long term up trend. AAPL? All over the place. Were you rewarded with higher returns for the extra risk? Depends on the time you were invested. Maybe, maybe not. Even if the returns were higher than the S&P500 were they higher when you adjust for the extra risk you took? Probably not.

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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by Seasonal »

Johm221122 wrote: Sat Oct 14, 2017 6:20 pm
Seasonal wrote: Sat Oct 14, 2017 6:12 pm Which is more diversified: a basket of 200 stocks of small companies, all in the same line of business, or a massive conglomerate with 200 divisions, each in a different line of business?
Definitely 200 small companies,one scandal in one corporation can bring down 200 divisions of one company
A downturn in one industry can bring down all companies in that industry.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by Seasonal »

nisiprius wrote: Sat Oct 14, 2017 6:49 pm
Johm221122 wrote: Sat Oct 14, 2017 6:20 pm
Seasonal wrote: Sat Oct 14, 2017 6:12 pm Which is more diversified: a basket of 200 stocks of small companies, all in the same line of business, or a massive conglomerate with 200 divisions, each in a different line of business?
Definitely 200 small companies,one scandal in one corporation can bring down 200 divisions of one company
Although it was not quite as extreme as 200 divisions, GE provides an illustration of a time when the stock of one corporation that is in many different businesses turned out not to be as diversified as owning the stocks of many different companies that are in different businesses.
That's a much easier case.
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Re: Which would you rather own: AAPL or S&P 600 Small Cap Index?

Post by Earl Lemongrab »

I never know how to answer these "if you could choose only one" questions because the don't specify why I can only choose one. On the face, the choice is obvious, as it's a lot harder for an index to go bust than a company. The latter happens all the time.

I don't have to choose just one though, I can own small-cap and large-cap and value and bonds and blah blah.
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