(Justin Pape)
Famous investor Warren Buffett is famous (among others) for winning a bet on money parked in a S&P 500 (SNPINDEX: ^ GSPC) The index fund would outperform professional fund managers over 10 years. It’s not easy to consistently beat a collection of the world’s biggest and most influential companies.
But can we do it over a year? I think so, and I’ll show you the crazy plan to get there in 2022. Here’s why and how you could beat the S&P 500 this year.
The anatomy of the S&P 500
The S&P 500 is a committee constructed index owned by S&P Dow Jones Indices, a joint venture majority owned by Global S&P, specializing in analysis and information for financial markets. The index includes 500 companies generally considered to be the largest in the United States and traditionally regarded as the best overall benchmark for the US stock market.
Image source: Getty Images.
But these 500 companies are not equally represented. The 10 highest-weighted members represent around 30% of the entire index. These companies include:
- Apple
- Microsoft
- Amazon
- Alphabet (class A shares)
- You’re here
- Alphabet (class C shares)
- Meta Platforms
- Nvidia
- Berkshire Hathaway (class B shares)
- UnitedHealth Group
This leaves the remaining 70% for the other 490 shares. A large market movement such as a bull market can move the index, but these larger members can also influence the index if their price movement is large enough.
Many top members have stretched ratings
A similar situation could be happening in the index right now – the S&P 500 is only 3% off its all-time high. But the wider stock market doesn’t look relatively healthy if you take a closer look.
For example, let’s look at the 500 stocks in the index. Only 357 of them are above their 200-day moving average, which indicates the price dynamics of a stock by averaging its closing price over the last 200 market sessions. In other words, more than one in four S&P 500 components are currently struggling.
If we look at the Nasdaq, another index that focuses on tech stocks, just over one in four stocks is above their 200-day moving average. In other words, over three quarters of Nasdaq stocks have negative price dynamics!
It looks like tech companies are going through a rough patch right now, which could be explained by persistently high inflation that threatens to push up interest rates. Higher interest rates can cause stock market valuations to fall.
Some mega-cap stocks that sit at the top of the S&P 500 have remained popular, resulting in continued price appreciation and high valuations.
AAPL PE Ratio data by YCharts. PE = price / profit.
Today, the S&P 500 has a price-to-earnings (PE) ratio of 24.5, which is about 50% above its historical average of 16. No one knows what will happen in the future, but it looks like the weakness of the stocks of the main indices could indicate the true state of the markets. If mega-caps finally start to correct, this could accelerate the decline of the S&P 500.
Go against the grain for gains
This scenario is an opportunity to outperform the market. Human nature makes you feel “safe” to buy stocks that have already risen, but the real opportunity might lie in battered stocks, those that have lost 50% to 80% in the past year. .
That doesn’t mean chasing shoddy stocks that are too speculative or companies that lose tons of money. But general sentiment in the growth universe has driven most stocks down; quality names traded at high valuations have become reasonable or even cheap in some cases.
If growth stocks start to rally this year, we might see the reverse of 2021 happening, when the S&P advanced as many growth stocks collapsed.
Understand the risks
There is a large gap between the larger stocks in the indices and the smaller ones below. I think there is a good chance that this gap will narrow, but no one knows for sure when that will happen.
The price movement that has occurred for most of 2021 could continue until 2022. Perhaps there will be a significant economic event that is unforeseen and will change everything.
The point is, you can’t know for sure; you can only look at the facts to get a feel for what is going on around you. The best way to position your investments for success is to identify high quality stocks, whether small, mid, or large cap, take a long-term approach with your holdings, and manage your risk appetite. . If you do this, you are bound to be successful in 2022 and beyond.
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The portfolio advisor returns 6/15/21
Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Teresa Kersten, an employee of LinkedIn, a subsidiary of Microsoft, is a member of the board of directors of The Motley Fool. Randi Zuckerberg, former director of market development and Facebook spokesperson and sister of Meta Platforms CEO Mark Zuckerberg, is a member of the board of directors of The Motley Fool. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Justin Pope has no position in the stocks mentioned. The Motley Fool owns and recommends Alphabet (A-shares), Alphabet (C-shares), Amazon, Apple, Berkshire Hathaway (B-shares), Meta Platforms, Inc., Microsoft, Nvidia, S&P Global and Tesla. The Motley Fool recommends UnitedHealth Group and recommends the following options: long January 2022 $ 1,920 calls to Amazon, long January 2023 $ 200 calls to Berkshire Hathaway (B-shares), long March 2023 $ 120 calls to Apple, short January 2022 1,940 $ calls on Amazon, short In January 2023, sell $ 200 on Berkshire Hathaway (B shares), short calls of $ 265 in January 2023 on Berkshire Hathaway (B shares) and short calls of $ 130 in March 2023 on Apple . The Motley Fool has a disclosure policy.
