The graphic on this page is amazing, simply amazing. Spend some time looking at it.
My thoughts.
The first part.
1. If you invest in a mutual fund, pull out the prospectus.
The prospectus will tell you the "rules" of that particular mutual fund: among other things, the relative percentage of investments in bonds vs equities, and in equities, the relative percentage in blue chip, growth, value, speculative, dividend-paying stocks, etc.
Today, there's a big issue with regard to ESG, but that story does not concern us here.
When the "deciders" that determine the mix of stocks and bonds in a particular mutual fund, they have to have some framework with which to begin.
The most elementary beginning is to divide their investments among stocks, bonds, and cash; and, among stocks, the percentage in the various sectors.
Hold that thought.
2. That graphic is a standard breakout of all publicly traded companies on the US stock exchanges aggregated by sector. The size of the "icon" is "market cap." I assume there are many different such graphics, most of them proprietary. This particular graph? I have no idea where it comes from but I assume it is either the one used by CNBC or very similar too what CNBC uses. Likewise, it is very likely very similar to what mutual funds use. It's the same for individual billionaires. You may do the same thing: you decide whether you want to invest in consumer defensive or automotive or banking or insurance or energy. Whether you realize it or not, you use a graph similar to the one we're discussing.
3. Now, imagine you are one of nine people in a board room of a mutual fund deciding how to invest one's capital. The PowerPoint presentation has eleven slides. Each sector will be represented on one slide with additional sub-sector slides.
4. Healthcare sector (one of eleven sectors), the "drug manufacturers -- general" sub-sector: JNJ, PFE, MRK, about a dozen major such companies. So, when the "deciders" get to this sub-sector they have a finite number of companies from which to choose. A finite number but well more than one.
5. Financial sector (one of eleven sectors), "banks-diversified" sub-sector: JPM, Wells Fargo, Bank of America, again, a finite number of companies from which to choose. Finite, but again, well more than one.
6. Again in the financial sector (one of eleven sectors), "insurance -di" one has a few choices, but by far, the big one is BRK-B (Warren Buffett). Finite, but again, well more than one from which to choose.
7. Now, the guys are sitting around the table and the technology sector (one of eleven sectors) is next up, specifically the sub-sector "consumer electronics." Quick, name the long list of "consumer electronic" companies on this graphic. LOL. That's a trick. There's only one: Apple (AAPL). Sure, there are hundreds of others, but they are so small in comparison Apple buries them all.
8. Using this graphic, if a mutual fund is "required" to invest 30% of their capital in "consumer electronics" that mutual fund doesn't have much choice. By default, it's AAPL.
9. Okay, that's the FIRST PART.
The second part:
1. For a company to succeed (or beat the competition), at it's most basic it needs to know what business it's in. For years I have wondered what sector or sub-sector I would place Apple. I've often said Apple is in the "fashion industry."
2. But with this particular graphic, someone decided Apple was in the "consumer electronics" sub-sector of the "technology sector." Not software infrastructure (Microsoft) or communications services (Google) or industrials or consumer defensive. Interestingly Amazon is in "consumer cyclical," sub-sector "internet retail." I certainly wouldn't think of Amazon as "cyclical." It's probably as "defensive" as Walmart, but it wouldn't work to have Walmart, PG, and AMZN all in the same quadrant.
The third part:
So, good, bad, or indifferent, the "powers that be" managed to put Microsoft, Google, Apple, Amazon and Walmart all in their own little spaces, none of them occupying the same sub-sector. This reminds me of the Pauli exclusion principle in physics.
This has to have been orchestrated, to keep these four separated. (By the way, "where's Waldo," Waldo being "Facebook" in this case?)
From all of this, much more could be said, but I'll leave it at this for now.
No comments:
Post a Comment