The Ignorant Investor

It's always pleasant to find out that one's own analysis is mirrored by someone with much more education and experience in the market. The other day, I pointed out that I was buying shares in an S&P 500 fund because small caps and international stocks had gone through such a huge run-up in recent years. So what do I see in the New York Times website over the weekend?

Stuart A. Schweitzer, global markets strategist at JPMorgan Asset and Wealth Management, said there were many explanations for megacaps having underperformed the market for six years.

Initially, he said, megacaps were simply too expensive. By the end of 1999, the 50 largest stocks in the S.& P. 500 had outperformed the index by 4.6 percent a year, on average, during the prior six years. But in the six years since the turn of this decade, the 50 largest stocks have underperformed the index by exactly the same amount, 4.6 percent a year on average.

"In 2000, megacaps were overvalued because expectations were too high," Mr. Schweitzer said. But when stocks started rebounding in 2003, he said investors began pouring money into small caps, which usually do better coming out of a recession. Now, he said, smaller stocks are overpriced. "It's the mirror image of 1999," when megacaps were too expensive and small caps were cheap, he said.

Mr. Schweitzer said he thought that megacaps would shine again "when it's cloudy out." If the market hits a rough patch, megacaps would probably fare better than small caps, he said.

Also worth noting: In the modern global system, there isn't necessarily much difference between an American company and an international one- the big players like those in S&P are already hedged against currency risks because of their foreign operations:

Megacaps might also benefit if the dollar declined, he said, because they earn much more of their profits overseas than most other United States companies. For instance, the 50 largest companies in the S.& P. 500 earn about 40 percent of their revenue outside the United States. The rest of the companies in that index earn on average less than a quarter of their profit abroad.