Standard & Poor's

Standard & Poor's (S&P) is a titan in the world of finance, best known for two things that shape the lives of nearly every investor: its influential stock market indices and its powerful credit ratings. Think of S&P as a global financial information provider that creates scorecards for both the stock market and corporate/government debt. Its most famous creation, the S&P 500, is a benchmark index that tracks the performance of 500 of the largest U.S. publicly traded companies, serving as a proxy for the health of the entire U.S. stock market. At the same time, its ratings division, S&P Global Ratings, acts like a financial detective agency, investigating the ability of companies and governments to pay back their debts. This dual role makes S&P an indispensable, if sometimes controversial, pillar of the modern financial system. Founded through a 1941 merger of two earlier firms, its roots stretch back to the 19th-century railroad boom, publishing financial information for investors.

For an ordinary investor, S&P's work pops up in two main areas: tracking market performance with indices and evaluating risk with credit ratings.

When you hear a news anchor say, “The market was up today,” they are most likely referring to an S&P index.

• The S&P 500: This is the big one. It's not just the 500 biggest companies; it's a carefully selected list chosen by a committee to represent the leading industries in the U.S. economy. Because of its broad coverage, the S&P 500 is the go-to benchmark against which professional mutual fund managers measure their success. For millions of people, investing is the S&P 500. The rise of passive investing has led to a flood of low-cost index funds and ETFs that simply aim to mirror the performance of this index, allowing you to own a slice of America's most prominent companies with a single purchase.
• Other Indices: S&P doesn't stop at the 500. It manages a whole family of indices, like the Dow Jones Industrial Average (another famous but narrower index), the S&P MidCap 400, and the S&P SmallCap 600, giving investors tools to track different segments of the market.

If you're considering buying a corporate or government bond, you'll almost certainly encounter an S&P credit rating. This is S&P's opinion on the borrower's ability to make its debt payments on time and in full. It’s like a financial report card. The ratings scale is an alphabet soup, but the concept is simple:

• Investment Grade: Ratings from 'AAA' (the absolute best, exceptionally stable and dependable) down to 'BBB-'. These are considered relatively safe investments.
• Speculative Grade (or Junk Bond): Ratings from 'BB+' down to 'C'. These are considered to have a higher risk of default.
• 'D': The issuer has already defaulted on its obligations.

These ratings matter immensely. A company with a high 'AAA' rating can borrow money at a lower interest rate than a company with a risky 'BB' rating. For investors, a sudden downgrade from S&P can cause a bond's price to plummet overnight. S&P is one of the “Big Three” rating agencies, alongside Moody's and Fitch Ratings.

An intelligent investor uses S&P's tools but never follows them blindly. The value investing philosophy, which emphasizes independent thought and buying assets for less than their true worth, demands a critical eye.

The legendary Warren Buffett has famously advised that most people would be better off simply buying a low-cost S&P 500 index fund. For those who don't have the time or inclination for deep financial analysis, this is sound advice. However, a dedicated value investor has a different goal. The S&P 500 is a list of large and popular companies, not necessarily undervalued ones. A value investor's job is to hunt for hidden gems and wonderful companies trading at fair prices, regardless of whether they are in a famous index. The index is a fantastic pond to fish in—a great source of ideas for further research—but you must still do your own due diligence. Buying a stock just because it's in the S&P 500 is not investing; it's following the crowd. A value investor seeks to find the business's intrinsic value and determine if the market is offering it at a discount.

Never outsource your thinking. This is especially true when it comes to credit ratings. S&P and other rating agencies were heavily criticized for their role in the 2008 financial crisis. They awarded top 'AAA' ratings to complex mortgage-backed securities that turned out to be incredibly risky, contributing to the near-collapse of the global financial system. One of the main criticisms revolves around a potential conflict of interest: S&P is paid by the very companies and governments that it rates. This creates pressure, whether real or perceived, to provide favorable ratings to keep clients happy. For a value investor, an S&P credit rating is just one piece of the puzzle. It's a useful shortcut, but it cannot replace your own analysis of a company's balance sheet, income statement, and ability to generate cash to cover its debts. A great company with a temporarily low credit rating could be a fantastic investment opportunity that the market has overlooked.