This year the 5 largest stocks in the S&P 500 have added $1.66 trillion in market capitalization while the remaining 495 have lost $1.61 trillion according to the BeSpoke Investment Group. Basically, only five stocks are supporting a stock market struggling because of Coronavirus and the economic shutdown. The top five (Apple, Google, Microsoft, Facebook, and Amazon) are great companies but this seems excessive. Tesla is up 233% this year despite barely being profitable. It would now rank in the top 10 in the S&P 500 were it even in the index. Kodak, which was basically out of business last Monday, went up over 1000% on Tuesday and Wednesday because they received a loan from the Government to produce ingredients to make pharmaceuticals (strange choice in my opinion). This all smacks of speculation. Investing is not speculation and vice-versa. The following passage by Benjamin Graham was posted by John Hussman (@hussmanjp) on Twitter:
“During the latter stage of the bull market culminating in 1929. the public acquired a completely different attitude towards the investment merits of common stocks… Why did the investing public turn its attention from dividends, from asset values, and from average earnings to transfer it almost exclusively to the earnings trend, i.e. to the changes in earnings expected in the future? The answer was, first, that the records of the past were proving an undependable guide to investment; and, second, that the rewards offered by the future had become irresistibly alluring.
“Along with this idea as to what constituted the basis for common-stock selection emerged a companion theory that common stocks represented the most profitable and therefore the most desirable media for long-term investment. This gospel was based on a certain amount of research, showing that diversified lists of common stocks had regularly increased in value over stated intervals of time for many years past.
“These statements sound innocent and plausible. Yet they concealed two theoretical weaknesses that could and did result in untold mischief. The first of these defects was that they abolished the fundamental distinctions between investment and speculation. The second was that they ignored the price of a stock in determining whether or not it was a desirable purchase.
“The notion that the desirability of a common stock was entirely independent of its price seems incredibly absurd. Yet the new-era theory led directly to this thesis… An alluring corollary of this principle was that making money in the stock market was now the easiest thing in the world. It was only necessary to buy ‘good’ stocks, regardless of price, and then to let nature take her upward course. The results of such a doctrine could not fail to be tragic.”
Benjamin Graham & David L. Dodd, Security Analysis, 1934
Who is Benjamin Graham? Probably enough to say he taught Warren Buffett how to invest. When will it all end? Who knows, but speculation requires making sure you are not holding the hot potato when the music stops. Investing does not.