INTRO: We all know the S&P
500 as one of the safest stock market investments in the world. The index is regularly being updated
to reflect the top 500 most profitable and stable companies in America. So, you can be pretty sure
that as long as America is still growing, the S&P 500 will be growing as well. But despite
the ubiquitous nature of the S&P 500, most people aren’t aware of the company behind the index S&P
Global. Aside from deciding who stays and leaves the S&P 500, S&P manages dozens of indices with
focuses on various regions and sectors such as the S&P Asia 50 and the S&P Midcap 400. S&P also
specializes in providing companies and governments with credit ratings. In 2011, for example,
S&P downgraded the US government from AAA to AA+. Considering all these background roles of S&P,
I don’t think you’d be surprised that S&P pulls in quite a bit of money.
In fact, they’re the 153rd most profitable company in the world with a market cap
right around $100 billion. So, here’s how S&P Global became the king of index funds.
POOR & CO:
Taking a look back, the history of S&P Global circles back to a man named Henry Varnum Poor
who was born on December 8, 1812 in Adover, Maine. Staying true to his name, Henry’s background was
rather poor. Henry and his brother John were the first people in their family to go to college and
they both got a law degree. After graduation, the two combined forces and established a local law
firm in Bangor, Maine. This was a rather lucrative career, and the brothers made sure to spend and
invest the money as effectively as possible. For example, in the 1840s, Maine’s rapidly growing
timber industry caught their attention. They invested heavily into the industry which ended
up making them quite wealthy. Now that they were wealthy, the brothers started to pursue what they
truly wanted. For John, this meant continuing to grow his wealth by becoming a business tycoon.
He went ahead and spent his time expanding Maine’s rail network and he quickly became
the business magnate that he dreamed of. As for Henry on the other hand, he was mostly content
with the wealth that he had already made, and had little desire to continuing chasing money. So,
he decided to spend his time trying to help other everyday investors get to his level. To do this,
Henry took up a job at one of his brother’s many company’s called the American Railroad Journal
and he became their manager and editor in 1849. For the next 13 years, Henry regularly published
articles regarding the financial and operational state/future of American railroad companies.
All this work eventually culminated into a book called History of Railroads and Canals in the
United States which made its debut in 1860. As the name suggests, the book attempted to provide
a detailed account of the entire history of US railroads and canals. After publishing this book,
Henry felt that he had done enough community service, and decided to follow his brother’s
footsteps deeper into the business world. In 1862, he took on a role as government commissioner of
Union Pacific Railroad and he was promoted to secretary his very first year. But, Henry wasn’t
all that impressed or excited about the job, and would end up leaving soon after. Henry returned
to spreading his knowledge about railroads, but this time, he decided to join forces with his son,
Henry William Poor. Together, they founded H.V. and H.W. Poor and Co., and in 1868, the company
published two railroad guidebooks which were updated on an annual basis. Around this time,
Henry’s brother John unfortunately passed away at age 63. And this was a clear signal to Henry
that he should start talking things easy. Over the decade, Henry slowly stepped away from the company
and let his son takeover completely. Ironically, Henry had many decades left to go as he didn’t end
up passing away till 1905 at age 92. So, there was no doubt that Henry had lived a pretty full life,
but his company Poor and Co was just ½ of what would eventually become S&P Global.
STANDARD STATISTICS COMPANY:
Moving into the 1900s, we saw more people enter the stock market and the creation of new
instruments called indicators. Nowadays, investors who solely rely on indicators are often laughed
at given that the usefulness of indicators is usually overstated. Nonetheless, back in
the in late 1800s and early 1900s, stock market indicators became all the craze. And amongst the
plethora of indicators that we were created, we saw one from a man named Charles Dow. Charles was
a journalist who had dedicated his entire career to bringing transparency to financial journalism.
He wanted to demystify the stock market by making financial news easily digestible. Every day,
after markets closed, Charles put together a two page summary of the day’s financial news called
the Customer’s Afternoon Letter. This newsletter became so popular that in 1889, Charles decided to
start his own publishing company. You might’ve heard of this one, it’s called the Wall Street
Journal. While the Wall Street Journal has become a staple publishing company today, no one really
associates it with Charles. Something that people do associate with Charles, however, is of course
the Dows Jones Industrial Average. Charles created this stock market indicator in 1896. He wanted to
allow his readers to guage the health of the stock market by just looking at one number. The Dow has
since become the most-cited stock market measure in history. Unfortunately, Charles never witnessed
this as he passed away in 1902, but his invention would become the basis of the second ½ of S&P
Global. In 1906, we saw the creation Standard Statistics Company which was heavily inspired
by Poor & Co. Instead of solely publishing about the financial state of railroad companies though,
Standard posted about the financial state of everything execpt for the railroad industry.
Given the lack of financial news at the time, this simple alteration was quite successful.
About 17 years later, Standard decided to draw inspiration from another financial icon which was
of course Charles Dow. Standard couldn’t just copy the Dow Jones though, they needed something to
make them unique. So, Standard decided to simply beat the Dow in terms of quantity. Instead of
creating an index based on 30 companies, Standard decided to create a indicator that encompassed 233
companies and 26 industries. Surely, this was a much better indicator than the Dow.
Simple statistics would tell you that the greater the sample size, the more accurate the result.
Over the next few decades, Standard also created other indices such as the 90 Stock
Composite Price Index which further grew the popularity of the company. By 1941,
it became clear that Standard was here to stay, so Poor & Co decided to join forces with them,
and together, they created Standard & Poors. Over the next 16 years, their indices went to
the moon as the stock market roared after WW2. This garnered the company’s indicators more
attention than ever before, and in 1957, they came out with their crown jewel, the S&P 500.
MCGRAW-HILL: Standard & Poor didn’t stay Standard & Poor
for very long though. In 1966, McGraw Hill, the company that tortured us through high school and
college, went ahead and purchased Standard & Poor. They kept the naming scheme of the S&P 500
and other indices, but they changed the name of the company itself to reflect the parent company
McGraw-Hill. Despite how popular S&P indices were, these didn’t really make the company any money.
At the time, no investor or hedge fund cared to invest in index funds. Index funds were seen as
garbage meant for unsophisticated investors. In fact, Vanguard’s founder John C Bogle was laughed
at for trying to create a company centered on index funds. Now, this doesn’t mean that
investors didn’t pay attention to the S&P 500. They paid very close close attention to the index
cause it was a great indicator and the perfect benchmark to beat. In other words, indices were
highly respected as an indicator but not respected at all as an investment. Considering this, it made
no sense for McGraw-Hill to create an index fund based on their indices. Instead, they decided
to leverage the brand name of S&P and generate revenue by providing other financial services.
One of these endeavors was the CUSIP Directory established in 1969. The directory assigns each
financial instrument a special 9 digit number that makes it much easier to clear and settle trades.
Today, the directory contains references to 57 million financial instruments around the world,
and it has become the standard for clearing and settling trades. McGraw-Hill also spent
significant effort in expanding S&P’s credit rating system which has become one of the most
respected credit rating systems in the world. McGraw-Hill also got S&P into the market analysis
sector. For a fee, S&P will provide customers with detailed intelligence and analysis reports into
whichever financial market they choose. Despite all the progress they were making with S&P,
McGraw-Hill was still an education company at their core, and they spent the majority
of their effort in trying to grow the education side of the company. For example, in 1986, McGraw
bought out their largest education competitor called The Economy Company. This acquisition
made McGraw the largest education publisher in the US. All of this growth with education put
their financial business on the back burner, but this would all change with the millennium.
INDEX FUND CRAZE:
Ever since the early 2000s, people started to come to a realization. While index funds were
boring and unsophisticated, they were also safe and reliable. And nothing made this clearer than
90% of internet companies going bankrupt. But, the pain wasn’t just limited to speculative internet
startups. Even the biggest, most established tech companies struggled to return to their
dot-com peaks. And some of them like Cisco and Intel still haven’t beaten their dotcom peaks.
Considering this, investors became more open to the idea of index fund investing. You might
not make massive returns, but you can be sure that after a recession or even a depression the indices
will post new all-time highs. People also started to argue that passive investing was even better
than active investing. And one of the biggest proponents of this argument was, of course,
Warren Buffett. In 2007, Warren Buffett placed a $1 million bet that index funds would outperform
hedge funds in the next decade. Warren ended up winning the bet, and this was the final green
light for investors to pile into index funds. Not only were index funds safer and less stressful,
but they literally posted better returns than hedge funds and even Warren Buffett himself.
Now, just because these guys couldn’t beat the market doesn’t mean that it’s impossible
to beat the market. Many investors have been beating the market for decades like Jim Simons,
but this requires a combination of work, risk, and luck that doesn’t seem to be worth it for most.
Anyway, all this new interest surrounding index funds brought in more revenue than ever
before for McGraw-Hill. In the meantime, their education business wasn’t doing nearly as well.
McGraw had just spent several years trying to grow an online study network called Gradeguru.com,
but this never took off. So, McGraw-Hill decided to ditch education and go all-in on S&P. In 2012,
they sold their education division to Apollo Global Management for $2.5 billion
in cash. Following this sale, the company changed their name to McGraw-Hill Financial,
and they used this name for the next couple of years. But, by 2016, it was clear that
everyone knew the company for their S&P indices, so they changed their name to S&P Global. Today,
S&P Global has grown into a massive conglomerate that profits $2 to $2.5 billion every quarter.
But, the most ironic part about the business is their stock price. Their entire brand is centered
on the idea that index fund investing is superior to active investing. Yet, their stock price has
crushed the S&P 500 since the financial crisis growing over 2000% which is roughly 4 times the
S&P 500. Maybe, it’ll settle down over time, but we’ll just have to see. Do you guys prefer to pick
stocks or just invest in the S&P 500? Comment that down below. Also, drop a like if you’re hodler.
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