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What are better newly listed S&P 500 companies or old companies?
Old companies are better than new companies.

The article makes an interesting observation about the S&P 500. Newly included companies are worse investments than the old companies. Since it started for nearly 50 years ago there has been a lot of changing in the companies that makes up this index. Some companies have been privatized and some companies have merged.

One may think that the new companies have more future potential for example an information technology company may be better suited for the future than a manufacturing company. But it suggests that new companies are more overpriced and it takes a while for the value to become fair.

Quote: “Many people might rather reasonably expect that the new additions would do the best over time. After all, they were in growing industries. But in nine of 10 sectors, the new firms did worse than the older ones. Between 1957 and 2003, the S&P 500 grew at an average annual clip of 10.85% (with a risk measure of 17.02%), compared with 11.4% growth for the total descendents (with a risk measure of 16.08%). So with less risk, the descendents fared considerably better. If you’d plunked $5,000 into each group in 1957, it would have grown to about $571,000 in the S&P 500 and $717,000 in the total descendents. The latter group did much better!

What happened?
According to Siegel: “Although the earnings, sales and even market value of the new firms grew faster than those of the older firms, the price investors paid for these stocks was simply too high to generate good returns. These higher prices meant lower dividend yields and therefore fewer shares accumulated through reinvesting dividends.” Think, for example, of when Yahoo! (Nasdaq: YHOO) was added to the S&P 500 in late 1999. The move was announced several days before it was actually added, giving investors time to bid the shares up considerably (in this case, 64%!). Even before being bid up, the shares were trading at lofty levels.”