OK, this stock market is top heavy. Remember, you buy the stock market when you buy a 500 index. But do you know how that index works? Look at the S&P 500 for example. Sure, it’s 500 stocks, but about a third of the index is dependent on five companies. Why? Because it’s a market cap weighted index meaning the size of a company, its market cap (price times shares outstanding) dictates its influence.
“Remember when a trillion dollars was a lot of money?” asks Spencer Jakab in The Wall Street Journal’s Heard on the Street feature, “Gigantic Stocks Are a Reason to Worry.” Five companies have reached that level recently. And look at Apple. Its market cap is approaching $3 trillion. What does this mean? “The precedents aren’t encouraging,” explains Jakab and he continues why, here:
One obvious reason is that even passive investors are increasingly betting on just a handful of stocks vulnerable to a dud product or regulatory setback. Thinking of it in terms of buying an entire business is helpful: Would you rather own the iPhone maker or all of McDonald’s, Walmart, AT&T, Philip Morris, Berkshire Hathaway, Procter & Gamble, JPMorgan Chase, Starbucks, Boeing, Deere and American Express combined? A lot would have to go wrong all at once to torpedo that diversified group of blue-chip stocks.
Action Line: This is a top-heavy market where you need to ask yourself how many iPhones can Apple really sell? Invest every dollar like it’s your last. And invest in terms of thinking about having that dollar buying a business.