During their recent episode of the Acquirers Podcast, Travis and Carlisle discussed S&P 500 Concentration Risk: Why Small-Cap and Mid-Cap Stocks Could Outperform. Here’s an excerpt from the episode:
[Tim] Toby, I saw a stat. I believe Morningstar now classifies mid cap as anything under 90 billion. I’m serious.
I believe that that’s true. And so like huge companies are now considered like mid caps that never were before. And so, yeah, I mean, the huge, huge subsectors of the market have been really massacred, especially last month.
So no, it’s a challenging market, but I think that there’s phenomenal long-term opportunities. And the other thing I was thinking about is like, if you’re managing money for a retiree and you’re a 70 year old and okay, well, I know the S&P does really well over time. And, you know, I want equity exposure.
That’s 50% AI right now. And I think the top 15 companies are, it’s like 47% at least. It’s so concentrated now.
It’s a really interesting thing where it’s like if that damn breaks, man, I mean, you could see absolutely a 50% decline in my opinion. I’m bullish on America. I’m bullish on, you know, I’m not a pessimist, but there’s a lot backed into that trade.
That’s for sure.
[Tobias] Even if we are in the singularity, there’s going to be a lot of volatility in asset prices going through. And if you’re hugely optimistic and bullish on the future, you can still see, I mean, we saw it in 2000, but clearly the internet has been transformative for the entire global economy, but there was still volatility on the way through. I agree with you.
I’ve had a look at that MDY, which is the mid cap 400, in the S&P’s definition of it, which is a profitable 400. And then I also track out of the Russell 1000, the 800 that sit below the top 200. They’re both at about as low as they’ve been in the data on a relative basis.
They make up this tiny little part of that index now because the index is so heavily weighted towards the top end of town. So if you’re in the S&P 500, you’ve got this excessive exposure to AI, which if you’re a bull, that’s fine. You just have to know what you’re doing.
Know that you have that exposure. If you’re somewhat concerned, then you should look outside that index, look outside those indexes and see what else is around, because there are some good opportunities, I think, outside of the major indexes. Because investing is not just finding the thing that works, it’s finding the thing that’s handicapped to give you, so you can participate.
Some of these prices are so high for some of these firms, even if they do work, it’s hard to see how they make money. As an investor, it’s hard to see how you make money.
[Tim] Well, yeah. And I think, look, if you’re in 2008 or if you’re in 2000 and you want to not get demolished, you kind of had to have been doing something different. You were going to look foolish.
And are you going to look foolish for six months or several years, whether it’s Michael Burry, whether it’s Buffett being written off in Fortune magazine or Forbes, whichever one it was? You’re going to look foolish and just out of touch with the times. And there’s going to be a narrative that you’re just wrong on.
But that’s the only way, really, that you can. You’re not going to time it perfectly and just know when to get out. Especially in this market where everyone wants to buy the dips and all that kind of stuff.
So, yeah, you have to be strong in your convictions. You got to know why you own stuff, what you own and why. It’s important to know why you own it.
And so that you don’t react emotionally to things on the positive or the negative.
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