Standard & Poor's

Standard & Poor's (often shortened to S&P) is a world-leading provider of financial market intelligence and a division of S&P Global. It's a household name in the investment world, primarily famous for two things: issuing credit ratings for debt and creating and managing influential stock market indices, most notably the legendary S&P 500. Formed in 1941 through the merger of two earlier financial information companies, S&P has become a cornerstone of the modern financial system. Along with Moody's and Fitch Ratings, it forms the “Big Three” credit rating agencies, whose opinions can make or break a company's or a country's ability to borrow money cheaply. For investors, S&P provides the benchmarks we measure ourselves against and the credit analysis that can serve as a starting point—but never the final word—for our own research.

S&P's influence comes from two distinct but equally powerful lines of business: rating debt and measuring markets. Understanding both is key to navigating the investment landscape.

At its core, a credit rating is S&P's educated opinion on the ability and willingness of a borrower—be it a corporation like Apple or a government like Germany—to meet its financial obligations in full and on time. These ratings are communicated through a simple letter-grade scale.

• The Scale: The ratings range from the coveted 'AAA' (extremely strong capacity to meet financial commitments) down to 'D' for entities that have already entered into default. Anything below 'BBB-' is considered non-investment grade, often called a 'junk bond'.
• Why It Matters: A higher credit rating allows a company or country to borrow money at a lower interest rate, as it's perceived as a safer bet. For a value investor, a company with a lower-than-expected rating might present an opportunity. If you believe the market and S&P have unfairly punished a company's debt, you might be able to buy its bonds at a discount, securing a higher yield.
• A Word of Caution: It's crucial to remember that ratings are opinions, not guarantees. The rating agencies, including S&P, faced heavy criticism for giving high ratings to complex mortgage-backed securities that later defaulted, playing a significant role in the 2008 financial crisis. Always do your own homework.

S&P is perhaps even more famous for its stock market indices, which serve as vital benchmarks for the entire investment industry.

• The S&P 500: This is the big one. The S&P 500 is an index comprising approximately 500 of the largest U.S. companies, selected by S&P's committee based on criteria like market size, liquidity, and sector representation. It's widely considered the best single gauge of large-cap U.S. equities.
• How It's Built: The S&P 500 is a market-capitalization-weighted index. This means that companies with a larger market cap (share price x number of shares outstanding) have a proportionally larger impact on the index's movement. A 5% jump in Microsoft's stock price will move the index far more than a 5% jump in a smaller company's stock.
• Beyond the 500: S&P also manages thousands of other indices, such as the S&P MidCap 400 and S&P SmallCap 600, which track the performance of medium and small-sized companies, respectively.

For a value investor, S&P's products are tools, not commandments. They should be used to inform your judgment, not replace it.

1. Ratings as a Red Flag, Not a Stop Sign: A credit downgrade can send a company's stock and bond prices tumbling. For the herd, this is a signal to sell. For the value investor, it's a signal to start digging. Following the wisdom of Benjamin Graham, you can take advantage of the pessimism of Mr. Market. If your independent analysis shows the company's long-term prospects are sound and the downgrade is an overreaction, you may have found a bargain.
2. The S&P 500 as a Yardstick, Not a Finish Line: Many fund managers are obsessed with “beating the S&P 500.” A value investor's primary goal, however, is to achieve satisfactory absolute returns over the long run with a proper margin of safety. The S&P 500 is an excellent benchmark to compare your long-term performance against, but short-term underperformance is irrelevant if your own well-researched investments are behaving as you expected.
3. A Hunting Ground for Quality: The list of companies in the S&P 500 is essentially a pre-screened list of large, established, and often durable businesses. A value investor can use this list as a starting point to hunt for wonderful companies that are trading at a fair—or even better, a cheap—price.