The Weekly Update 2-17-2012

There are two things that humans have a difficult time looking at.  Number one is the sun and number two is the truth!

For this example I am going to compare the sun to Apple Inc.  If you follow a few of the select companies in corporate America, like Apple, you noticed the spike up in the share price last week.  It was enough to add a cool $75 billion in market capitalization!

Since the market averages, like the S&P 500, Nasdaq Composite Index and the Nasdaq 100 Index are market capitalization weighted, Apple's huge market cap skews the entire index up or down, depending on which way in moves on any given day.   Ned Davis Research reported that Apple now represents 15% of the entire Nasdaq 100 Index!  In my opinion, that is a disproportionate allocation.

In essence, this means money managers are unlikely to outperform a comparable index, like the S&P 500 without owning Apple!   The shares of Apple may or may not be over priced by the market place, but if they increase in price and you don't own it, you are likely in the underperform the comparative category.  On the other hand if you don't own Apple and it goes down you are likely to outperform a comparable index.

I have seen this before.  In the 1980's it was nearly impossible to outperform an international index, like the EAFE without owning Japan.  We thought Japan was overvalued and owned the EAFE- ex Japan.  We were about one year early on the collapse of the Japanese market, so for one year we underperformed versus the  EAFE and then looked really smart after that market dropped.  Which was nice!

The TRUTH is that it will be hard to make normal comparisons of performance in 2012 unless the weighting of Apple is reduced in the various indexes.  As an independent investment advisor, my TRUTH is that we will be measured versus a data point that would require me to take on potential market and volatility risk to beat.  Only time will tell if and when this was the prudent thing to do.

So, the Apple market price valuation is a bit hard to look at, just like the sun.  This is especially true for people like me who found there was no bid and were no buyers for Apple on October 19th, 1987! 

The TRUTH is that it will be hard to explain underperformance versus an index for 2012 if you choose not to concentrate a portfolio in this one company.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.