Invest In The Original S&P 500

By Will Ashworth | February 14, 2009 AAA

Investors who read about the markets are probably familiar with the name Jeremy Siegel, author of the often-mentioned book "Stocks For The Long Run". As a longtime proponent of buy-and-hold investing, Siegel and associates have undertaken countless studies in recent years to back their assertions. One study examined the stocks from the original S&P 500, which was created some 47 years ago in March 1957. Siegel examined the performance of the original S&P 500 stocks (those surviving) with an updated index that takes into account all the additions over the past five decades. Probably not a surprise to the author and professor, the original stock index outperformed the updated version. The trick is to figure out how this can help you make money.

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Track Records Matter
The original index comprised 425 industrials, 25 railroads and 50 utilities. Since then, Standard and Poor's has made several alterations and additions to it, including removing the small number of companies that were foreign-based, providing the clearest picture possible of America's largest companies. To keep up with mergers, buyouts and bankruptcies, it has added an average of 20 companies to the index annually between 1957 and 2003. It's easy to see the difference between today's version and the one that made its debut a half-century earlier. At the end of 2003, 125 firms from the original S&P 500 still existed, although some had changed names. Of those 125, 94 were still in the index. That's longevity. (Find out how the first market averages were calculated and what they mean for investors today; read A Trip Through Index History.)

The Total Descendants Portfolio, which includes spinoffs and other distributions from the original firms and their descendants, exceeded the actual S&P 500 on an annualized basis between March 1957 and the end of 2003 in all but one sector - consumer discretionary. The reason consumer discretionary stocks underperformed over the 46 years is due to General Motors (NYSE:GM), which generated annual returns of 8.28%, 1.81% worse than the sector as a whole. It's only worsened since.

Diversification Is For The Birds
Of the top 20 performing stocks in the study, four continue to operate under the same name as in 1957. They are all household names: Abbott Laboratories (NYSE:ABT), Pfizer (NYSE:PFE), Coca-Cola (NYSE:KO) and Merck (NYSE:MRK). From 2003 to February 13, 2009, the average total return of all four is minus 7.6%, which is 18% better than the S&P 500 itself. Philip Morris would have been a fifth except that it spent five years operating under the Altria (NYSE:MO) name before Altria spun off Philip Morris International (NYSE:PM).

It's not the most diversified portfolio, but I don't think Warren Buffett would have a problem with it. For those that do have a problem holding just four stocks in a portfolio, feel free to add some of the other stocks still trading. They include Lorillard (NYSE:LO), PepsiCo (NYSE:PEP), Colgate-Palmolive (NYSE:CL) and Crane (NYSE:CR). You can find the list by doing a simple internet search. Keep in mind that the four stocks I've chosen are the best performers over a 50-year period. The others listed didn't do badly; they just weren't the best performers.

Bottom Line
I believe Siegel's study proves the KISS (Keep It Simple Stupid) rule definitely applies when investing. Instead of trying to figure out the latest and greatest method for picking stocks, why not buy stocks whose companies are tried-and-true brand names? The numbers speak for themselves.

They don't call him "The Oracle" for nothing. Learn how Buffett comes up with his winning picks in Think Like Warren Buffett.)

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