This Good Quality Diversified Investment is Up 223 Times in 41 Years.
After decades of experience in the investment industry, I have learned that
there is always something to worry about. There have been a variety of
concerns almost too long to list over the years. In this decade alone, we have
had a global pandemic, the first global economic shutdown in history and
skyrocketing government debt levels. In 2021, supply chain issues caused rising
inflation, which is requiring higher interest rates to suppress inflation. This year,
the invasion of Ukraine has raised anxiety levels and increased the cost of living
even more. So, for every year, there has always been a multitude of reasons why
an investor should avoid equities or move to cash if you owned stocks.
While we hear about all of the problems, what we tend not to pay attention to
is that the train of change keeps chugging along. The pace of change is now
doubling every ten years! Quietly and consistently, new technologies, inventions
and creativity increase productivity and efficiencies for businesses and
corporations. This boosts earnings. If we listen to the news, it often seems like
stock prices can never overcome all of the problems. However, the pace of change
has enabled the S&P 500 to rise by 8% per year on average since its inception in
1924. That does not even include the dividends that were paid out every year.
While an 8% return might not seem like much over all the bad and good periods
of this last century, $1,000 compounded at 8% per year ends up being worth
$1,885,940 98 years after 1924. That is an appreciation of 1,886 times. (Tables are
from moneychimp.com)
While this statistic may resonate more to readers like my father, father in law
and a few clients who are in their 90’s, lets look at something that more readers
might be able to relate to.
After some very good years of growth for stock prices in the late 1970s, a new
US market index was created to fill a gap. To provide some background, the Dow
Jones Industrial Average of 30 of the largest US companies was created in 1896.
As mentioned earlier, the S&P 500 Index of 500 larger US companies became
active in 1924. At this time, a company must have a value of more than US$13.1
billion to be in the S&P 500. The NASDAQ index began in 1971 and is heavily
weighted towards the information technology sector.
The S&P 400 Index was developed in February 1981 to include 400 US midsized
companies that had not qualified to be in the S&P 500. At this time, the
value of a company must be worth between US$3.6 billion and US$13.1 billion to
be included in this index. The Russell 2000 Index was created by Frank Russell in
1984 to represent the shares of smaller US companies. As of April 2022, the
average size of the 2,000 companies in this index were worth US$3.17 billion.
While you will find information about the price of many of these market averages
in media reports, there is one index that seems to be ignored when it should not
be. The report below shows that mid-sized companies seem to be “hiding in plain
sight.” They have been overlooked. Try to find the S&P 400 Index value
mentioned in market reports. Please read the points under the titles in black print
for important facts I find few investors are aware of.
Wells Capital Management, which today has US$ 482 billion in assets under
management, published this report in 2014. It is not easy to find data about the
early years of the S&P 400 Index. Please see a table from this report below,
showing how the S&P 400 and S&P 500 performed from the inception of the S&P
400 in 1981 to September 2013. Over this period, the S&P 400 produced an
annual compound rate of return of 14.02% compared to 11.13% for the S&P 500.
That is an outperformance of 2.89% per year on average over this 32-year period.
The primary goal of almost every professional money manager is to outperform
the S&P 500 without any extra risk or volatility. This was an excellent way to
outperform the S&P 500 over this period.
It is much easier to get data about the more recent performance, so please see
the information in the chart below to compare the performance of the S&P 400 and
S&P 500 from when this period ended, (September 30, 2013) to the end of 2021, a
period of 8 years.
For this period, the S&P 500 performed better than the S&P 400. The S&P
500 gained 304% or 18.43% compounded annually compared to 213% or 14.83%
for the S&P 400 index. (See the figures on the bottom right for the compounded
annual growth rate under Ann (CGR)).
If you look at the blue and green lines on the chart, you can see that most of
this outperformance by the S&P 500 has occurred since 2018. Close to 25% of
the S&P 500 Index is made up of only eight large technology companies such as
Amazon, Apple, Google, Meta (formerly Facebook), Microsoft, Netflix, Nvidia
and Tesla. Most of these stocks appreciated significantly after Covid 19 swept
over the world, forcing many to work and stay at home because these companies
benefited directly from this. Therefore, this outperformance may not last too
much longer. In fact, the share values of many of these companies have been hit
hard in the bear market of 2022.
According to my calculations, the S&P 400 has produced an annual compound
growth rate of 14.18% from February 1981 to the end of December 2021, while
the S&P 500 grew at a rate of 12.47%. Lets look to see what the actual dollar
results have been over this long-term period and compare it to local real estate
prices for example. The price of a detached home in Abbotsford and Vancouver
was close to the $100,000 range in 1981 before the 1981 recession knocked stock
prices and real estate values lower. This calculator shows that $100,000 invested
in the S&P 500 over the last 41 years (February 1, 1981 to December 31, 2021)
was worth $12,373,849.13 or 124 times more.
The table below shows that $100,000 invested in the S&P 400 Index was worth
$22,971,617.99 or 223 times more. How many homes have appreciated by 124 or
223 times since 1981 where you live?
These figures enable you to compare these returns to any other type of asset as
well. This is proof of how businesses and corporations have been able to grow and
produce more earnings over the long-term in spite of all of the issues and concerns
that we have lived through in recent decades. Consequently, what should a
successful investor, or a wise practical man or woman focus on?
What has happened in the past shows that the concerns of the day are a major
negative distraction to the positive long-term growth that has been occurring in US
businesses.
The S&P 500 has produced very attractive returns since 1981 compared to
other assets. The S&P 400 index of mid-sized companies has been able to produce
even better returns without increasing the average risk and volatility for most of
this period.
Yet, I have found that very few investors and money managers who do not have
access to these Updates are aware of the advantages of investing in US mid-sized
companies. Why is this the case? The investment industry is very traditional. To
me, it seems like everyone else is doing what everyone else is doing without
thinking about what everyone else is doing. Whatever the reason, I want you to be
aware of the characteristics of the S&P 400 Index so that you can understand what
you own in your portfolio and why you own it. I don’t want US mid-sized stocks
to be hiding in plain sight for you!
SAR Update
When someone is reported missing, we often have a lot of time to respond to a
call since a plan of action has to be developed. Other times, the situation is urgent.
On rare occasions it is as urgent as it gets. That is what happened recently.
was in charge of dispatching our team on May 30th when a call came in from
Fire Dispatch requesting us to respond to a vehicle that had driven off the road
into Harrison Lake with a person trapped inside. I was able to call Fire Dispatch
back in seconds to find out exactly where the accident occurred and then paged
our team to respond. I asked our team members who lived in Harrison to go
directly to the scene and the others to meet at our base to get our watercraft.
You can see the white pickup truck sitting in the water with the driving lights
on about 20 feet from the shore in the photo on the previous page. One of our
team members who lived in Harrison just happened to be driving his vehicle near
his home when he received the page. He drove to the scene and swam out to the
vehicle and was finally able to break the drivers side window. No air bubbles
came out of the vehicle, which meant that no air remained for the man to breathe.
After being in the vehicle for almost 30 minutes, our team member was able to
pull out the man with his assistance and stand of top of the roof so their heads
were above water and the man started breathing. The firemen on scene helped
bring the person and rescuer to the waters edge by the road and then carry him up
the rocks on a stretcher and take him to an ambulance. The ambulance then took
him to an air ambulance that was waiting nearby. It took another 30 minutes for
the air ambulance to depart. After it did, a paramedic came and told us that the
man’s vital signs were fine. He was recovering in the hospital the next day. Please
see a photo on the next page showing the tracks where the truck drove off of the
road.
Being a lifeguard in my high school and university years, I knew that people
could find some air in a high point in a vehicle that was submerged and be able to
breathe until they could escape, but that was not the case here. It has also become
well known that people can still be revived if they have been in very cold water
for a long time, but this man did not need to be revived. The sequence of events
was witnessed by many people and no one has any explanation for what
happened. It is truly hard to believe. I thought I had seen it all until this happened.
Some medical/science people need to investigate this to discover something we
may not be aware of yet.
Nevertheless, it was a very happy and successful ending to what seemed
almost certain to be a tragedy. It was a total surprise to all of us. Have a good day
and take care my friend!
