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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Night Trader who wrote (13911)	2/12/2002 4:54:57 PM
From: geoffrey Wren	Respond to of 78670

In theory the dropping of one stock and addition of another should be seamless, as you substitute an equal value of the dropped stock with an equal value of new stock. The stock that was dropped could outperform or underperform the market from there. I believe I read once that dropped stocks tend to underperform the market, but who knows for sure. The problems with getting long term results from indexes as I understand them: 1. Survivor bias. The US has been successful in wars and diplomacy. But like the Roman Empire, it will not always be so. One atomic bomb from a rogue nation or group could really ruin investment results. 2. When it comes to evaluations of micro-cap stocks, I wonder about spreads. If a stock is 1.0 x 1.25 today and you buy at 1.0, and ten years later it is 2.25 x 2.50, and you sell, you have made 80%. But bid to bid it has moved up 100% in those four years. There could be some bias to overrepresent profit for such companies. 3. The rates of return will be lower if you hold in a mutual fund (fund costs) or if you hold yourself (commission cost). 4. There is a certain fallacy about long term rates. If some Roman had $1, invested at an annual 5% profit, saved 2 points of that profit (leaving 3% for consumption and taxes), and left the rest for the family and the family kept it going for 2000 years, that family would be worth $1.5861 x 10 to the 17th power. A trillion is 1 x 10 to the 12th power. In other words, there is a limit on long term investment success due to lack of discipline or war or taxes or something. The great returns enjoyed in the US in the last century must be aberational. But who knows, maybe they will continue. It's pretty much the only game in town to play, anyway.

To: Night Trader who wrote (13911)	2/12/2002 11:03:59 PM
From: Don Earl	Respond to of 78670

Indexes such as the S&P and Russel constantly change. The main consideration for being included in the various indexes is market capitalization. Russel makes the adjustments once a year and S&P can make changes anytime. The result is it's almost impossible for the market cap of the indexes NOT to go up. It's about like cheating at solitaire, if you're loosing, just go through the down cards until you find a winner. It's the main reason fund managers almost never beat the performance of the index even if they match the index stock for stock. When a fund manager sells a looser and adds another issue at the top of the chart, the fund takes a loss. The index doesn't take a loss since all it really amounts to is a list of the currently best performing stocks and their prices. You should be able to find more information on how stocks are added and dropped at these sites: spglobal.com russell.com While on the topic of indexes, does anyone have a handy link to charts for the Wilshire 5000? It doesn't seem to be very popular with the media because it gives a fairly accurate picture of what the market is really doing without any room for the spin factor.