Military Investment Series Part 3: The S Fund

BLUF: The S Fund is the other 20% of the market that is not the C Fund, you can buy S Fund this at a 1:4 ratio to C Fund (20% S and 80% C) to ensure 99% of the market by capitalization.

We need to talk about market capitalization here to better understand what is the difference between Small Cap and Large Cap companies. Everybody’s favorite stock that everyone already owns, Apple Computer, symbol APPL is a great example of a large cap company. In the entire market, there have been 5.25 billion shares issued of the company each share represents fractional ownership of Apple. Each share is currently trading at a 52 week high of $134.33 per share. Its Market Capitalization is 711.03 billion dollars meaning there is approximately $711,030,000,000.00 worth of Apple stock out there. This is considered a “Large Cap” company which has exceeded greatly the minimum cut off at $5 billion market cap by some definitions.

Let’s look at another company, Stephan Company, who is the only authorized importer of coca leaves to process for cocaine in America. The useless leaves are sold to Coca-Cola to make into soda while the cocaine is sold to Mallinckrodt, a pharmaceutical firm, for medicinal purposes. This company has an monopoly on the cocaine production in the United States and it is publicly traded! Right now its stock ticker SCL is trading at $77.14 with 22.40 million shares issued. We multiply $77.14 x 22.4 million shares to get $1.73 billion in market cap. We can call this a small cap company since its cap falls between $300 million and $2 billion. This capitalization is paltry compared to Apple’s $711 Billion cap, we can conclude that Apple is worth 411 times as much as Stephan.

As you can recall the C Fund was buying stock in the 500 largest companies in the American stock market. These 500 companies make up 80% of the market by capitalization. What if you wanted to own that other 20% of the market in include a smaller company like Stephan? What if you wanted to invest in them all because you also see no upside in large cap companies?

If you think about it all the companies like Apple, Microsoft, and Dell all started as small cap companies and grew into large cap companies. This is where everyone should be looking for the next Amazon or Apple. There is very little upside for the mature developed companies that are in the S&P 500. Look at Lehman Brothers, in February 2007, the stock reached a record $86.18, giving Lehman a market capitalization of close to $60 billion. What happened?

There are several indexes that track these other smaller companies. Stephan is in the S&P SmallCap 600 Index which has all companies that range from $400 million to $1.8 billion. What about all the companies from $1.9 billion to $5 billion dollars? We call these the MidCap Companies that can be represented by the S&P MidCap 400 Index which includes 400 companies with a cap between $1.4 billion to $5.9 billion.

Moving away from Standard and Poor we have Russell 3000 vs 2000. The Russell 3000 makes up by market cap 98% of every company in the American Stock market. The Russell 2000 is the bottom 2000 companies of the 3000 which makes it all medium and small cap companies.

Getting back to the TSP fund called the S Fund that follows the Dow Jones U.S. Completion Total Stock Market (TSM) Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index. This index excludes all the stocks from the S&P 500 and that are trading below $1 a share.

With you can balance the C and S to ensure you pretty much own every company traded in america for the low price of 2.9 cents per $100. Next up the I fund.





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