MEDLEY & COMPANY
An Investment Advisory Firm
March 1999 Investment News
"Why wasn't my account up 28% in 1998? Wasn't everyone else's?"
In both our summer and fall newsletters we pointed out the recent historic divergence between some of the largest capitalization stocks (big companies) and the rest of the market. More recently a number of other commentators have dissected the numbers and reported some eye-opening statistics.
Vanguard's Charles Freeman reported in his November 19, 1998, letter to shareholders that "Within the S&P 500 Index, [for the 12 months ended October 31, 1998] the 50 largest stocks, by market cap, were up 37%, while the other 450 stocks were up only 5.5%."
In a similar vein, the Babson Funds reported to their shareholders that "Over the 12 months ended November 30, 1998, the Russell 2000 index [small company stocks] declined by 6.6%, while the Standard & Poor's 500 index was up 23.7%."
And perhaps most striking, the Dodge & Cox fund group's annual report noted that for the first nine months of 1998 "More than ninety percent of the S&P 500's total return came from ten companies alone which had price increases of 74% . . . [while] the remaining 490 companies in the S&P 500 had an average price decline of about 4% for the same period."
While these observations provide little comfort to those who were not invested in the new "nifty fifty," we continue to believe that buying opportunities still exist in the remainder of the market and that the current concern about "overvaluation" applies to a relative few of the more than 10,000 companies whose stocks are publicly traded.
"Maybe I should wait for things to settle down
before I invest."
New investors often express concerns about current political and economic events and postpone investment decisions waiting for things to "settle down." It is our belief that capitalism in the U.S. and other well-developed countries will do very well going forward in spite of a never-ending procession of troubling macro economic events.
For example, after a foreign currency crisis roiled the markets late last year many people were worried about a stock market crash here at home. And yet, when those same people were asked if they thought WalMart might have to close its doors, their reply was a stare of disbelief.
Perhaps a look at the last 25 years can help prove the point.
President Nixon's resignation in 1974 had the potential to shake the republic to its core. The Arab oil embargo in 1973 and 1974 resulted in skyrocketing inflation and, along with the nation's political turmoil, caused a 40% decline in the stock market. The inflation bubble in 1979 and 1980 drove interest rates up to unsustainable levels and punished capital intensive businesses throughout the world. The 1989 fall of the Berlin Wall and subsequent collapse of international communism realigned political and economic alliances around the globe. In 1991 Iraq invaded Kuwait threatening to suck its neighbors and ultimately the major powers into a months-long conflagration. And, most recently, there was Monica.
In spite of all of this uncertainty and the resulting ups and downs of the market during this period, for the 25 years from 1973 through 1997 the U.S. stock market averaged annual total returns in excess of 13%.
Our advice: pick good quality common stocks and/or equity mutual funds and own them for a long time.
You'll have a compounding machine.
"The performance of the S&P 500 stocks [for the last 12 months] ... was remarkably different from that of the rest of the market."
Vanguard Windsor Fund
Annual Report
October 31, 1998
