Standard & Poor's

Standard & Poor's (also known as S&P) is a titan in the world of financial information and analysis. A division of its parent company, S&P Global, it's one of the most influential voices in investment markets, primarily famous for two things: its benchmark stock market indexes and its powerful credit ratings. For the average investor, understanding what S&P does is like knowing the rules of the game and who the referees are. The company's most famous creation, the S&P 500 index, is the go-to barometer for the health of the U.S. stock market, tracking the performance of 500 of America's largest corporations. At the same time, S&P's credit ratings act as financial “report cards” for companies and governments, telling lenders how likely they are to get their money back. These two functions make S&P a cornerstone of the modern financial landscape, providing essential tools for both passive and active investors.

S&P's influence stems from its dual roles as both a market tracker and a risk assessor. These functions, while different, are equally critical for investors navigating the complexities of the market.

Think of the S&P 500 as the headline news for the U.S. stock market. It’s a market-capitalization-weighted index, meaning larger companies like Apple or Microsoft have a bigger impact on its value than smaller ones. Because it represents about 80% of the total value of the U.S. stock market, its daily movements are watched obsessively by professionals and amateurs alike as a proxy for the entire market's performance. For many, the simplest way to invest is to “buy the market.” This is often done through low-cost index funds or ETFs that aim to replicate the performance of the S&P 500. Even the legendary value investor Warren Buffett has recommended this strategy for the vast majority of people who don't have the time or expertise to pick individual stocks. It's a straightforward way to achieve broad diversification and participate in the long-term growth of the American economy.

When a company or a government wants to borrow money by issuing a bond, investors need to know the risk involved. This is where S&P's credit ratings come in. They are essentially an opinion on the borrower's ability to pay back its debt on time and in full. The ratings are assigned on a simple letter-grade scale:

• AAA: The highest possible rating, indicating an extremely strong capacity to meet financial commitments. Think of it as a straight-A student.
• Investment Grade: Ratings from AAA down to BBB- suggest a relatively low risk of default. Most pension funds and conservative investors are restricted to buying bonds with these ratings.
• Junk Bonds: Also called “speculative grade,” these are ratings of BB+ and below. They carry a higher risk of default but, to compensate investors for taking that risk, they must offer a much higher interest payment, or yield.
• D: This grade means the issuer has already defaulted on its obligations.

These ratings directly influence the interest rate a borrower must pay. A pristine AAA rating means cheaper borrowing costs, while a “junk” rating means the borrower has to pay a premium.

While S&P provides indispensable tools, a savvy value investor uses them as a starting point, not a final verdict. The goal is always to think for yourself and find value where others don't see it.

Passively tracking the S&P 500 is a solid strategy, but the disciples of Benjamin Graham and Warren Buffett aim to beat the market, not just match it. For a value investor, the S&P 500 isn't just a benchmark; it's a high-quality hunting ground. It's a pre-screened list of large, established businesses. The value investor's job is to sift through these 500 companies, analyze their fundamentals, and identify the ones that are trading for significantly less than their intrinsic worth—the truly undervalued gems. The index tells you what the big players are; your job is to figure out which of them are on sale.

Value investors are famously skeptical, and that skepticism should extend to credit ratings. While useful, they are not infallible. The most glaring example was the 2008 financial crisis, where S&P and other rating agencies gave top-tier AAA ratings to complex mortgage-backed securities that turned out to be incredibly risky, contributing to a global economic meltdown. This serves as a powerful reminder: never outsource your thinking. A credit rating is an opinion, not a fact. A true investor does their own homework, digging into a company's balance sheet to understand its debt load, cash flow, and overall financial health. Sometimes, the greatest opportunities are found in companies that rating agencies have downgraded, but whose underlying business remains strong. By doing the hard work of analysis, you might just find a bargain that the rest of the market, relying on a simple letter grade, has overlooked.