In the Sum of the Parts, There Are Only the Parts

Dear Clients and Friends,

At its core, the stock market is a collection of business prices that are aggregated to produce a number that we call a ‘stock market average’.  The old saying, “the stock market is really just a market of stocks”, rings true when you take a deep dive into the numbers that comprise the average.  The ‘sum of the parts’ theme is highlighted in today’s market because the market is currently being driven by a handful of stocks that have created the illusion that the market is doing exceptionally well, but when in fact that is only a half-truth.  Any Gestalt Psychologist would quickly contest the whole, i.e. the stock market, is different than its parts, i.e. individual stocks.

My intention in this writing is not to use Gestalt Psychology to explain the vagaries of today’s stock market, but rather reveal a simple truth about today’s markets, and hopefully leave you with a better understanding of the market.  Technology has long been an exciting and profitable sector for many investors.  While it has created some magnificent fortunes, it has also destroyed countless fortunes, and therein lies the rub.  Technology is by its very nature is dynamic, it changes rapidly and can create significant profits, but those profits many times are at the expense of another older, or less-new technology.  So, the profits that Google generates today are simply advertisements that are no longer flowing through other traditional media outlets, which means traditional media suffers and Google benefits.  Over time this process leads to Polaroid, Kodak, and Xerox go the way of the Do-Do bird as companies like Apple and Amazon create tremendous profits.

The reason I am focusing on technology and the theme of the ‘sum of the parts’ is because today the S&P 500 has over 15% of its value in the top 5 technology stocks, (Facebook, Apple, Amazon, Google, and Microsoft).   One has to ask if this is an accurate representation of the stock market, and if so you should feel comfortable with the current ‘market’.  Think about this, the top 5 technology companies have more representation than the total sum of the all energy, all real estate, all chemicals and metals, and all utilities in the S&P 500.  The issue I have with the market’s current skewed balanced towards these 5 technology companies is not company specific, but rather it is an over representation of the future value of what these companies WILL be worth over the coming decade.

One only has to look at the very recent past to see this dynamic competition at work in the technology sector.  In 2008, Research in Motion, the maker of the Blackberry phone had 50 million customers and had a stock worth $145/share.  By 2013 the stock was down in the single digits and their core franchise was essentially destroyed by Google and Apple.  In 2012 the company generated over 18 Bil in revenues but in only 3 years the company’s revenue had dropped to 3.3 Bil. The most Darwinian sector of the market is technology and yet the market has bet the house on its future, I am clearly not convinced.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All investing involves risks including loss of principal. No strategy assures success or protects against losses.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

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