GCI: Year-End Portfolio Review 2019gciadmin
S&P 500 – This is a market capitalization (company size) weighted index comprised of the largest 500 US stocks. It is not necessarily representative of the economy, nor is it balanced. For instance, the sectors ‘IT’ and ‘Communication Services’ together account for more than a third of the total index- and bear in mind that ‘Communication Services’ is a new sector that was created to obscure how large ‘IT’ had grown. The stocks remained the same, some have just been re-allocated to this new sector.
Dow Jones Industrial Average – This is a hand-selected group of 30 companies that are chosen to represent the economy overall. As a measurement tool, it is very widely used, despite being largely meaningless. This is because it is a ‘price-weighted’ index: meaning the index level is the sum of all the stock prices of the underlying companies. A company worth $1bn with 1bn shares would have a stock price of $1, a company worth $1bn with only 1m shares would have a price of $1000, and therefore have 1000x more of an influence on the index. That as a construct is clearly absurd and not helpful.
Your portfolio is more concentrated than average. We don’t dilute your portfolio with unexceptional companies, choosing instead to avoid some industries with poor economics altogether.
Your portfolio generates higher returns on capital than average. Over the long run, a stock’s performance will be determined by the returns they generate on capital (ROIC). Furthermore, we focus on companies where those returns are protected by wide competitive moats.
Your portfolio is growing earnings faster than average. Which when paired with higher incremental returns on capital, results in superior compounded returns.