a caveat to what follows

The 1990s were a devastating period for traditional value investors, many of whom lost their jobs at the end of that decade because of their chronic underperformance of broad equity benchmarks like the S&P 500. As typically happens with this sort of thing, the first several years of this century were marked by wild outperformance of value over growth. This allowed many of the just cashiered value investors to reestablish themselves as hedge fund/private equity gurus catering to pension funds desperate for any kind of magic bullet to prop up underfunded traditional pension plans. As far as I can tell, however, traditional Graham-and-Dodd value almost immediately reverted to its 1990s form …and has continued to underperform to this day.

relative performance as a tool to achieve absolute performance

As deep value investors understand all too well, it’s much easier to say that stock A is cheaper than stock B than it is to say that stock A is flat-out cheap. So most professionals I’ve worked with/for structure their portfolios with a close eye to the structure of the index, most often the S&P 500, that they are benchmarked against. Here’s what that index looks like today:

Information Technology 31.3% of the index

Financials 13.9%

Consumer Discretionary 10.7%

Health Care 10.6%

Communication Services 8.9%

Industrials 8.6%

Consumer Staples 5.7%

Energy 3.4%

Utilities 2.5%

Real Estate 2.2%

Materials 2.1%.

We can sort these broadly into defensive, meaning whose profits are not very sensitive to changes in the business cycle, and aggressive or cyclical, meaning profits will respond strongly to changes in economic conditions.

Defensives (18.8% of the index) and the easiest group to categorize, are:

Health Care 10.6%

Consumer staples 5.7%

Utilities 2.5%

Traditional cyclicals (40.9%)

Financials 13.9%

Consumer discretionary 10.7%

Industrials 8.6%

Energy 3.4%

Real estate 2.2%

Materials 2.1%

IT cyclicals (40.2%)

Information technology 31.3%

Communication services 8.9%.