Fifty Years Of The Popularity-Weighted Indexing

April 28, 2010

The top of the capitalization index is filled with companies at the height of their popularity and, judging by the amount of Fallen Angels, due for a fall.

A half century is a long time, particularly one that spans the remarkable pace of technological and social change over the past 50 years. Lucky enough to witness the past five (and a half!) decades, I marvel not only at how much our lives have changed, but also at the ebbs and flows in fashion, movies, music, and pop culture. What’s in, what’s out, what’s hot, what’s not? My how the fads rotate! I figured the long hair and bell bottoms from my Santa Barbara college days would forever be a fashion relic, like today’s tattoos for women and piercings for men. Yet, three years ago my son visited from college, sporting shaggy locks and the latest “wide legged” jeans. Now, I am told, they are no longer in vogue, replaced by “skinny legged” jeans. As they say in France, Plus ça change, plus c’est la même chose.

Let’s rewind to Ike’s last year in office and consider the top 10 names by market capitalization in the S&P 500 Index. As Table 1 shows, they are all familiar names, except maybe Texas Company (which became Texaco, now part of Chevron) and, for the younger set, Standard Oil of New Jersey (which became Exxon and begat Exxon Mobil). Only 4 of the top 10 remain in the top 10 today, all with much-reduced market clout: the four comprised 18% of the stock market in 1960, and have a 7% footprint today.

Fifty Years Of The Popularity-Weighted Indexing Table 1

How many of the six new stocks in today’s top ten were familiar names back then? Well, no harm in missing three of these which didn’t even exist: Microsoft, Apple, and Wal-Mart. This is the miracle of entrepreneurial capitalism: three of the top four market-cap companies were mere ideas a few decades ago! The other three—Johnson & Johnson, Proctor & Gamble, and JPMorgan Chase—were respected names in 1960, although J.D. Rockefeller would have been horrified to see J.P. Morgan in front of the Chase name.

The pattern is similar when we look at the top 10 publicly traded companies, ranked by the economic scale of their business, albeit with more mergers.1 As Table 2 shows, 6 of the 1960 top 10 survive in today’s top 10, albeit in altered form as four companies. Socony Mobil and Standard Oil of New Jersey eventually joined to form Exxon Mobil, while Gulf Oil joined Texas Company along with Standard Oil of California as the main constituents of Chevron. As with the capitalization-weighted lists, there are six newcomers. We can also see a similar reduction in concentration, with the six survivors (merged down to four) comprising 20% of the publicly-traded
economy in 1960, and half as much today.

Fifty Years Of The Popularity-Weighted Indexing Table 2

So what? Ben Graham once suggested that, in the short run, the stock market is a voting machine and, in the long run, a weighing machine.


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