Ron Surz does the second most interesting work in analyzing funds after myself and Marketocracy. Recently, he sent me this interesting write up of what the market did in 2005. Ron's stuff is really interesting because he calculates the odds of producing that portfolio by buying stocks at random vs. what you selected. We do a similar thing on Marketocracy for that matter, and I have some new stuff coming out in 2006 that will blow anyone away. Anyways, here's the PDF:
The interesting thing to me was how much the SP500 index has been lagging the broad market the last few years. I've noticed that myself.
Personally, I think the S&P500 is broken. I mean look, the S&P500 is supposed to be a proxy for the market as a whole, right? Now before we had computers, that made sense. And when the S&P500 came out, there weren't 7,000 stocks in the market, so looking at just the top 500 made sense. But now that we do have computers, why settle for a “proxy for the market” when you can have the “whole market” by investing in the Wilshire 5000 index?
Most of the S&P500 index investors are missing the point that all the efficient market guys used the S&P500 to replace the market because they didn't want to have to calculate a total market index. Well, Wilshire/Dow Jones has done that work now. In fact, I'm writing a paper on what Marketocracy is doing, and I'm going to have to use the W5000 instead of the S&P500 because the index has drifted so far away.
I think its time to fire Standard & Poors. In theory, Standard & Poors supposed to be adding value by doing the following:
- They investigate the companies they choose in detail.
- They try to keep the index balanced by sector.
- They go in and “adjust” the market cap of the underlying companies to keep the index “realistic”. (Though strangely, that's not “float”. Basically, the weighting a company gets is “kindof” their market cap.)
Ok, fair enough. How did they do?
WorldCom, Enron, K-Mart. These were all S&P 500 stocks. In fact, because of the way the index works, it took S&P 2 weeks after each of those companies was downgraded by their bond rating division to pull them from the index.
That's investigating them in detail?
Perhaps a company so important to the financial industry shouldn't be owned by a book publishing house.
Anyways, the link to Ron's stuff is here:
He's not as opinionated as me, but you'll get facts about the market you won't get anywhere else.
Technorati Tags: investing, stocks, wallstreet
