The Right Way to Buy the S&P 500
Two worthy investment goals... 'A catastrophe in large-cap stocks'... A faltering narrative... Falsehoods and absurd extrapolations... Insiders selling at decade highs... The right way to buy the S&P 500... A hopeful note...
Concentrate...
That's what the stock market is telling investors to do today... to concentrate their wealth into a handful of companies.
The top 10% of all U.S. stocks now account for roughly 75% of the market cap of the entire U.S. stock market. So if you're buying index funds in your 401(k) or other retirement account, you may think you're diversifying... But you're allocating 75% of your money into the top 10% of stocks.
As a Stansberry Research subscriber, you're probably not putting all your wealth into index funds... But that's what most people do with their retirement accounts. Vanguard founder and index-investing promoter John Bogle has been telling folks to do it since the 1970s, when his company offered the first index fund.
And he said it again and again in his 2007 book, The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns, which opens:
Successful investing is all about common sense... Simple arithmetic suggests, and history confirms, that the winning strategy is to own all of the nation's publicly held businesses at very low cost.
Bogle says this works for two reasons: When you buy the whole market, you get (1) the broadest possible diversification at (2) the tiniest possible costs.
I (Dan Ferris) will leave the issue of costs for another day, but it's hard to miss the fact that the primary reason folks are buying index funds is gone. And worse still, you're now doing the exact opposite – the mistake Bogle wanted you to avoid – when you buy index funds.
Now, instead of getting the broadest possible diversification, you're focusing most of your money on the top 10% of stocks...
If you're buying the S&P 500 Index, that 10% is about 50 stocks. And speaking of the world's most-watched asset price, the top 10 stocks in the S&P 500 now account for a record 41% of the index.
The top 10 S&P 500 stocks of course include the "Magnificent Seven," the mega-cap tech names that have dominated the index for the past several years.
Even Vanguard – the firm that practically invented passive investing through index funds – is now warning investors that bonds will likely outperform stocks over the next decade... and that large-cap growth stocks will likely perform particularly poorly.
MarketWatch reports...
[Vanguard's] model implies absolute catastrophe for those who invest in large U.S. growth stocks – the kind currently dominating the market. The firm sees a passive investment in U.S. growth losing somewhere between 20% and 40% of its value in real or constant dollars over the next 10 years. (That's based on forecast nominal average returns of minus 0.4% a year to minus 1.6% a year, and their inflation estimates.)
Vanguard's entire business is based on passive investing in index funds. When these guys say the stocks most folks are concentrating their retirement portfolios in are due for catastrophic losses, they do it with more credibility than most.
No-brainer, big-cap stocks have certainly disappointed investors before...
As I've pointed out more than once in the Digest, the Mag 7 is the Nifty Fifty of our time.
In the early 1970s, the Nifty Fifty list included stocks like Xerox, Polaroid, and Avon Products. They were viewed as no-brainer investments. It didn't matter how much you paid for them because they'd grow forever, and investors who owned them would always make money.
These stocks peaked in 1973. Some went out of business entirely. And years later, folks who'd held these "sure thing" investments were down between 50% and 90% on nearly all of them.
Four of the current mega-cap no-brainers – Alphabet, Amazon, Tesla, and Meta Platforms – have recently filed their latest annual reports. Apple and Microsoft use different fiscal years and have recently filed quarterly reports. Only three of the six shot the lights out. The other three reported results between decent and disastrous.
Nvidia hasn't yet filed its report. But however it performs, the overall Mag 7 narrative is faltering.
Part of the bad news for investors is that these stocks aren't priced for the narrative to falter. They're priced for the narrative to continue for many years to come...
All narratives eventually falter...
That's true for various reasons, including the fact that, no matter how much truth a narrative contains, it's also filled with falsehoods and absurd extrapolations.
Famed short seller James Chanos recently shared this reminder on the social platform X...
One of the great myths of the Dot.com Bubble was that Internet traffic was doubling every three months. It was still growing 100% every year, but not 1,000%. This miscalculation had huge implications for telecom capex going forward.
Chanos then pasted an excerpt from a 2002 Wall Street Journal article, which pointed out that...
Nationwide, only 2.7% of the installed fiber is actually being used, according to Telegeography Inc. Much of the remaining fiber – called "dark fiber" in industry parlance – may remain dormant forever.
You may remember companies like Global Crossing, NorthPoint Communications, and WorldCom, which built out fiber-optic capacity during the dot-com boom. All three later declared bankruptcy and were acquired in whole or in part by bigger companies.
Corey McLaughlin and I have highlighted enormous capital spending on AI in several Digests...
It feels very much like what Chanos describes in his recent X post. I doubt it'll end well.
Only the brightest possible future could justify spending the hundreds of billions of dollars that have already gone into AI. Investor David Cahn underscored the utter absurdity of this extrapolation in a recent Substack article...
Many people are betting that the hundreds of billions in investment will unleash trillions of dollars of growth. They see AI reinventing our economy – with AI agents doing knowledge work, robots automating manufacturing, and large models unleashing new drugs to cure diseases. Some even predict new government entitlements will be needed to distribute all this new wealth.
The prospect of new entitlement programs is ironic, with President Donald Trump's team now looking for fraud and waste in the Medicare system (which I'd bet is tens if not hundreds of billions of dollars). The Roman Empire offered its people bread and circuses as it declined. In the U.S., we offer entitlements and social media.
I'm not saying the Mag 7 will declare bankruptcy...
Though I'd be less surprised by that than most folks would, I fully recognize that these are some of the most cash-gushing businesses that have ever existed. And while I'm talking about them as a group, they're seven different businesses, which I expect will meet seven different fates over the long term.
It won't surprise me at all if I'm still using Amazon, Microsoft Office, and my Apple iPhone in 10 years. It'll surprise me somewhat more if I'm still using Alphabet's Google search engine, and it'll surprise me the most if anybody cares much about Meta or Tesla.
Google and Meta's social media products are free, which makes me wonder how much of a competitive advantage they really have at any given moment. Tesla rode a wave of overhyped climate hysteria and government subsidies, both of which are now fading, revealing less demand for electric vehicles than anticipated (again mirroring the mistake fiber-optic builders made in the dot-com boom).
In short, more than one investor mistake is embedded in the Mag 7 at current valuations.
It reminds me of when I recommended selling short Lehman Brothers in the April 2008 issue of Extreme Value. Lehman had made every mistake of that moment, including huge private-equity exposure, huge leverage, huge real estate exposure, and reliance on internal estimates of nontraded assets.
It strikes me as perfectly, ironically human that the great herd of individual investors is moving as one, making the same mistakes all at once, all right out in the open. The herd tends to be the worst capital allocators on the planet.
Corporate insiders, on the other hand, tend to be some of the best investors...
That's according to University of Michigan finance professor Nejat Seyhun, who writes on his website, insidersentiment.com, that...
Research for the last 60 years shows that insiders are consistently the most informed of all traders in the equities market.
Insiders buy their own firm's stock before the price goes up and sell before it goes down, beating the market by about 5% each time. They achieve a return that is triple the market return, on average.
And those experts are being cautious. A recent MarketWatch article based on Seyhun's work declares:
Corporate insiders are more bearish than they've been in over a decade.
The article includes data showing that nearly 88% of corporate insiders have been net sellers. Seyhun recognizes that insiders sell for a lot of reasons, but told MarketWatch...
I don't see the recent acceleration of insider selling corresponding to a recent rise in prices... So, I see this as a bearish move on the part of insiders.
Time will tell if he's right about recent insider-selling trends presaging a market downturn. I'm less interested in timing than in understanding where we stand at any given moment. Everything we've covered in this Digest so far is just another way of looking at different market participants' behavior as the most popular stocks in the world trade at nosebleed levels based on extrapolations of perfection.
History shows without any shadow of a doubt that such episodes tend to work out poorly for those who aren't careful enough to sidestep the biggest mistakes.
Perhaps you think I'm telling you to sell the S&P 500...
I'm not. You probably just need to buy it differently.
Investors are concentrated in the S&P 500 because it's weighted by market capitalization, with the largest stocks taking up the largest share of the index and the smallest-cap stocks getting the smallest share.
But there's another way to buy those same 500 stocks, which stands to outperform the cap-weighted index. You can buy equal positions of all 500 stocks. There's even an exchange-traded fund that does just that... the Invesco S&P 500 Equal Weight Fund (RSP).
According to our friend Jason Goepfert over at SentimenTrader, RSP is compelling these days. In a recent post on X, Goepfert published some data showing that the equally weighted S&P 500 recovered in less than half the time of the cap-weighted index in the wake of the Nifty Fifty peak in 1973.
So, if our comparison of the Magnificent Seven to the Nifty Fifty is correct, you'll likely still see a drawdown in a bear market or correction if you own the RSP instead of the cap-weighted index. But, if the Nifty Fifty episode is a fitting analog to the Mag 7, maybe you'll see your portfolio recover much more quickly than all those folks holding the cap-weighted version.
It seems silly to say you'll do so much better buying the same 500 stocks, but history suggests that could be the case. And at the very least, you're getting that wide diversification Bogle talked about in his book if you buy RSP instead of the ubiquitous cap-weighted fund, SPY.
That leaves us on a hopeful note. Rather than selling it all and heading for the hills, you could probably keep your cap-weighted funds and simply begin allocating to equal-weighted indexes for the next few years.
It's like the late, great value investor Peter Cundill used to say, "There's always something to do," meaning a way to invest successfully, no matter what sort of environment you're dealing with.
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In today's mailbag, feedback on Part II of our annual Report Card by Stansberry Research publisher Brett Aitken. (You can also read Part I here... If you didn't see the publication you were looking for on Friday, it's there.) Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"The report card is very interesting. But I also might have confirmation bias. I have done well with the products that have the A grades and will certainly continue to do so. I added another Credit Opportunities pick yesterday!" – Stansberry Alliance member Jeffrey G.
"Brett, I heartily endorse your A++ grade for Mike DiBiase and Bill McGilton's Stansberry's Credit Opportunities ("SCO") service. Everything that Mike just wrote about the typical individual stock investor's ignorance of (and intimidation by) distressed debt was true for me when I subscribed to SCO in the late summer of 2019. At that point I'd been investing in stocks for about 25 years with mixed results... overall a bit above average and was seeking another investment method in the first year of my retirement.
"I was intrigued by what Mike had written so I subscribed to SCO, and having just retired, I undertook a careful reading of back issues and tracked his and Porter's recommendations from the previous 3-4 years to gauge the truthfulness of their claimed results. I was impressed and little did I know that 6-7 months later the COVID crisis would present exactly the opportunities that they'd described.
"When the bottom dropped out in March 2020, I took a deep breath and dove in headfirst, not only buying Mike's newest recommendations but bonds that he and Bill had analyzed in the prior couple of years that were trading at 'panicked' prices. Needless to say, rotating out of stocks I took a big hit on my stocks to raise the capital when I did but the gains I made on the bonds that I bought were fantastic, cumulatively more than twice the losses on my stocks.
"Besides SCO, since then I have subscribed to two other bond analysts ([Rob] Spivey and [Marty] Fridson) and my portfolio is now 77% distressed bonds, the large majority of which are Mike's and Bill's recommendations, and I owe them a big thank you for the education that they've given me, besides the fruits of those investments. So, again, I wholeheartedly endorse your A++ grade for SCO." – Subscriber Jim H.
Corey McLaughlin comment: Thank you for the feedback. Jim, it sounds like you've gotten exactly out of Credit Opportunities what we think all subscribers can.
Incidentally, if anyone else wants to give Credit Opportunities a try, now is the perfect time.
Through tomorrow, you can get started for the single-best price we've ever offered for the service. Click here for more details. You'll hear a story from another subscriber who used the strategy to retire at age 52... and why he says "you'd be insane not to at least try it."
Good investing,
Dan Ferris
Medford, Oregon
February 10, 2025