Author Topic: if 6% make 50% why not ditch index funds?  (Read 7169 times)

tmitchell

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if 6% make 50% why not ditch index funds?
« on: March 04, 2016, 11:50:38 AM »
Just saw this and am wondering:

http://www.usatoday.com/story/money/markets/2016/03/02/6-companies-make-50-us-profit/81175914/

If 6% of all companies make 50% of the profits, why not just invest in these instead of index funds?


2Birds1Stone

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Re: if 6% make 50% why not ditch index funds?
« Reply #1 on: March 04, 2016, 11:53:54 AM »
That 6% changes quite regularly.

Jeremy E.

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Re: if 6% make 50% why not ditch index funds?
« Reply #2 on: March 04, 2016, 12:16:24 PM »
because market timing is for fools

Eric

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Re: if 6% make 50% why not ditch index funds?
« Reply #3 on: March 04, 2016, 12:22:52 PM »
Most index funds are market cap weighted, so you are buying the most of the largest companies.

The other consideration is that profits are not directly tied to stock prices.  Prices are more a function of hitting or missing target profit goals.  Just making a profit is not enough.  So even if you're the biggest company in the world with the highest profits, if your profits are falling, your stock performance will not be that great going forward.

bobechs

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Re: if 6% make 50% why not ditch index funds?
« Reply #4 on: March 04, 2016, 12:52:24 PM »
I would add that the market has already digested and adjusted for the profitability -and to the extent it can the future profitability- of these blue chip companies in the market price of their common stock.

So, even if you discount volatility, diversification and other strategic goals of investment it remains unlikely these companies are the best bets to outperform the market index.

It would make more sense to find the fifty least profitable S&P 500 companies and take them off your list, but even that is not a sure winner until you investigate why they lag in profits; that might signal an opportunity the market has missed.  Maybe.

dachs

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Re: if 6% make 50% why not ditch index funds?
« Reply #5 on: March 04, 2016, 01:05:26 PM »
Just saw this and am wondering:

http://www.usatoday.com/story/money/markets/2016/03/02/6-companies-make-50-us-profit/81175914/

If 6% of all companies make 50% of the profits, why not just invest in these instead of index funds?

It's not only about how much the company makes but also how much you pay for it (stock price).

Aphalite

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Re: if 6% make 50% why not ditch index funds?
« Reply #6 on: March 04, 2016, 01:41:35 PM »
I would add that the market has already digested and adjusted for the profitability -and to the extent it can the future profitability- of these blue chip companies in the market price of their common stock.

This is true only some of the time. It's not intelligent to assume the market is always efficient

It's not only about how much the company makes but also how much you pay for it (stock price).

This is the main reason. Your returns are governed by what you pay for $1 of profits. Even an index fund can't escape this fundamental fact

bobechs

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Re: if 6% make 50% why not ditch index funds?
« Reply #7 on: March 04, 2016, 02:20:05 PM »
I would add that the market has already digested and adjusted for the profitability -and to the extent it can the future profitability- of these blue chip companies in the market price of their common stock.

This is true only some of the time. It's not intelligent to assume the market is always efficient



For the high-profile blue chip companies listed in the linked article it is true all of the time.

thedayisbrave

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Re: if 6% make 50% why not ditch index funds?
« Reply #8 on: March 04, 2016, 03:31:17 PM »
How do you know ahead of time which 6 companies will make 50% of the profits?

steveo

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Re: if 6% make 50% why not ditch index funds?
« Reply #9 on: March 04, 2016, 03:54:32 PM »
I think it's a good point. My answer is that it's easier to just invest in the index. So the companies may change and I'll just get pulled along. I don't have to look those companies up or manage trading in and out of them.

I have only just started investing my surplus funds as the mortgage is just paid off. I love index funds. I know my desired asset allocation and I just buy when I have the money. So simple and easy.

Travis

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Re: if 6% make 50% why not ditch index funds?
« Reply #10 on: March 04, 2016, 04:00:27 PM »
Apple is the biggest company in the world and has been extremely profitable for years, but even its stock price can have a bad week with little to do with the company's health.

Aphalite said it best. If you buy Apple at $200 and it drops to $190 that is a much bigger deal to you than if you bought back at $10 and it dropped from $200 to $190.

EarlyStart

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Re: if 6% make 50% why not ditch index funds?
« Reply #11 on: March 06, 2016, 04:53:25 PM »
The absolute amount a company earns doesn't really matter for shareholders. It's about the percentage change over time.

e.g. if you own a company with $1,000,000 profit/free cash flow/whatever, and it grows by 5% per year, you would expect the same return as if the company had $1,000 profit/free cash flow/whatever growing at the same rate. If the $1,000/year company grew earnings at 6%, you'd expect the shares to appreciate more than the $1,000,000/year company.

frugalnacho

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Re: if 6% make 50% why not ditch index funds?
« Reply #12 on: March 07, 2016, 12:09:40 PM »
Just saw this and am wondering:

http://www.usatoday.com/story/money/markets/2016/03/02/6-companies-make-50-us-profit/81175914/

If 6% of all companies make 50% of the profits, why not just invest in these instead of index funds?

Why not take it a step further and just buy the 1 company that makes the most profit? It's fool proof.  I mean besides not knowing in advance how any of those companies are going to perform.

dachs

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Re: if 6% make 50% why not ditch index funds?
« Reply #13 on: March 07, 2016, 12:57:21 PM »
Just saw this and am wondering:

http://www.usatoday.com/story/money/markets/2016/03/02/6-companies-make-50-us-profit/81175914/

If 6% of all companies make 50% of the profits, why not just invest in these instead of index funds?

Why not take it a step further and just buy the 1 company that makes the most profit? It's fool proof.  I mean besides not knowing in advance how any of those companies are going to perform.

Well it's not that difficult to guess the companies that will probably make the morst earnings in the next year. The problem ist that you are not the only one who can do that and that's reflected by the price. Earnings and performance of the stock are two different things.

I would love to invest in a company that only makes 100 000$ every year, issues 100 000 shares and the share price is 1$.
« Last Edit: March 07, 2016, 12:59:00 PM by dachs »

I'm a red panda

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Re: if 6% make 50% why not ditch index funds?
« Reply #14 on: March 07, 2016, 02:30:33 PM »
How do you know ahead of time which 6 companies will make 50% of the profits?

And how do you know they will keep doing that?

Enron was a decent stock...until it really wasn't.

Jeremy E.

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Re: if 6% make 50% why not ditch index funds?
« Reply #15 on: March 07, 2016, 03:15:24 PM »
Apple is the biggest company in the world and has been extremely profitable for years, but even its stock price can have a bad week with little to do with the company's health.

Aphalite said it best. If you buy Apple at $200 and it drops to $190 that is a much bigger deal to you than if you bought back at $10 and it dropped from $200 to $190.
I think Alphabet (owner of google) might be bigger than Apple now

AZryan

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Re: if 6% make 50% why not ditch index funds?
« Reply #16 on: March 09, 2016, 12:52:53 PM »
Quote from: Jeremy E.
because market timing is for fools
Obviously 'winner picking' is just wild guessing. I'd be willing to say it's totally along the same lines as market timing (meaning foolish and misguided), but it's not actually 'timing the market'.
Maybe just semantics, but I don't think so.

And yeah, last I saw, Alphabet overtook Apple for the top slot -so a good example of how winners change. But Exxon's drop from the top slot is probably a far better example of how even the most profitable industry can be turned upside-down.

My biggest fear is AI, VR, Robotics, MakerBots, etc. putting all the current winners out of business, and the new winners not even being in the stock market to take their place.
When every company looks like a dying newspaper, and the future runs on bitcoin and pirated data files of literally everything under the sun.

Hopefully it'll be a slow, soft crash turning Earth into a Star Trekian utopia of abundance. But in a world of 'assassination-worthy cartoons' and the possible future leader of the free world 'smack talking' the rest of the planet, I don't see that being real likely.

AZryan

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Re: if 6% make 50% why not ditch index funds?
« Reply #17 on: March 09, 2016, 11:38:32 PM »
Quote from: marketmap
A somewhat more complex yet robust tactical allocation model, involves the use and combination of quantitative multivariables keyed off of longer term investment times frames with predetermined fixed transaction dates.

Are you specifically trying to make sure the least amount of people understand your advice and suggestions in favor of perhaps dazzling the blogosphere with your blinding financial word salad?

Yes, many people here get a lot of fairly complex financial stuff, but c'mon. I rarely see such an extreme use of inscrutable jargon. And certainly not by people trying to be of any help to financial newbies trying to learn clever, helpful money tips. And if you're not helping people who don't already know this stuff, why are you bothering to educate experts?

I used to see this same thing on audiophile forums.

Eggman111

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Re: if 6% make 50% why not ditch index funds?
« Reply #18 on: March 09, 2016, 11:45:57 PM »

blinding financial word salad

Thank you for a good laugh. :D

That is a hilarious analogy.


Sent from my Nexus 5 using Tapatalk


LAGuy

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Re: if 6% make 50% why not ditch index funds?
« Reply #19 on: March 10, 2016, 10:33:16 AM »
Profits aren't everything either. Just look at a company like Amazon that ran at a loss for years to become the monster they are today. They saw a rapidly increasing stock price all while turning a slight loss.

dachs

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Re: if 6% make 50% why not ditch index funds?
« Reply #20 on: March 10, 2016, 11:10:08 AM »
Profits aren't everything either. Just look at a company like Amazon that ran at a loss for years to become the monster they are today. They saw a rapidly increasing stock price all while turning a slight loss.

Yes and that was because people expected bigger future returns. In that case they were right.