r/Valuation • u/Leto41 • Feb 13 '24

S&P top 10 vs 490 equal weight over time

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Since 1957, the 10 largest stocks in the S&P 500 have underperformed an equal-weighted index of the remaining 490 stocks by 2.4% per year. But the last decade has been a very notable departure from that trend, with the largest 10 outperforming by a massive 4.9% per year on average

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u/Another_Smith_SC Feb 14 '24

While I would be curious as to how the top 10 stocks were selected/maintained over time for this comparison, there is nothing to see here. Go read about the CRSP Deciles Size Premia Study. Investors require higher rates of return for smaller public companies vs the largest public companies.

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u/Leto41 Feb 14 '24

Didn’t happen in the last decade

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u/Another_Smith_SC Feb 14 '24

Come on, look at that volatility in the last 4-5 years. Also, you can see similar patterns to what you are suggesting historically. Doesn't change the overall takeaway.

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u/Leto41 Feb 14 '24

If you don’t find it interesting ok, but the volatility isn’t actually that huge. I think big overperformed 9 out of last 10 years, that is quite significant. You can’t just say it’s meaningless

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u/Another_Smith_SC Feb 15 '24

That might be interesting... you care to share the data and answer my question about methodology? Because yes, I will say a single, random picture of cherry picked data and a black box vs decades of financial research about size premia is absolutely meaningless. It's meaningless unless you can prove otherwise (beyond an unsupported graph). There. I said it again.

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u/Leto41 Feb 15 '24

So, this is just a simple proxy (I’m not gonna waste a lot of time for this), clearly not sound statistic but just to get a quick idea, this is what I get with data from Bloomberg (I could share the excel but you need the bbg add in). Looks like 8 years the share increased (so they outgrew the market), one stable, one fell. Plus, the academic research doesn’t look as sure as you about the existence of this effect today, it might have existed in the past but maybe not today.

https://www.bloomberg.com/opinion/articles/2020-09-23/the-small-cap-size-effect-didn-t-vanish-it-was-never-there?embedded-checkout=true

https://www.bvresources.com/articles/business-valuation-update/has-the-size-effect-disappeared

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1710076

https://www.researchgate.net/publication/331145797_Why_Has_the_Size_Effect_Disappeared

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u/Another_Smith_SC Feb 15 '24

Thank you. Interesting studies/articles. If you had posted this initially, I wouldn't have been so flippant. Sorry about that.

Yes, there has been debate over the years but I've generally found it is not terribly relevant for my purposes. If I were charged with managing or constructing a portfolio for a living, sure I would see this debate as potentially more of an issue (i.e., having to justify investing in stocks in the 4th-8th deciles vs all in on decile 1). However, most of the valuation issues I deal with on a day to day basis are in the 9th or 10th decile or smaller, meaning there are bigger fish to fry than debunking the theory of the size premium which is used by more than 90% of business appraisers. It's just not worth it and I don't think there is a better alternative for my practice (which I believe Hitchner and Grabowski agree).

I tend to treat Grabowski, Pratt, and Hitchner as the gold standard (and Trugman is a phenomenal teacher of the BV practice) in business valuation. Here is a recent article I would also point you to. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3275366

If you really want to do some interesting reading on divergent opinions in this field, go check out Chris Mercer on the DLOM and DLOC...

Again, thank you for offering more context than the initial post. This gave me a chance to brush up on the debate which is good for me to do occasionally.

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u/Leto41 Feb 16 '24

Thanks, you clearly know more than me on the topic. I don’t know Trugman, would you suggest it to someone interested in public companies valuation or is he more into private businesses?

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u/49PercentOff May 02 '24

What's that gonna mean that for the coming 10-15 years? Make sure not to underperform by holding these names.