Article on new indexing technique (caught my attention)

[jIM_Ohio]

A Better Way of Indexing? - Kiplinger.com

I am not an indexer by any stretch- the above article caught my attention.

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Very interesting indeed! Thanks for sharing!

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Still, . .could it be as well-thought-out as my Dogs of the Sectors strategy?

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Still, . .could it be as well-thought-out as my Dogs of the Sectors strategy?

Never!

[cptacek]

(from the article)
We only looked at six different factors, and each factor we looked at worked. In a way, it wasn't surprising because we already knew if you move away from market-cap weighting, you are going to do better.

One of the more interesting factors we looked at was the number of employees at a company. It worked. We quickly realized that just about anything you find in a company's financials will work. So we didn't need to go on a fishing expedition to find the best factors.

The article looked interesting to me, and if there was a better way to combine indexing with a value portfolio, I would be interested, but the second paragraph struck me as "maybe I'm getting sold a bill of goods here" with this particular fund. I mean, ANYTHING in the company's financials? How about an index based on "Other Net Operating Income"? How about "Income from Discontinued Operations"?

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But I tend to think of indexing as anything that has low turnover and is easy and cheap to implement -- something you could base an ETF on.

By that measure, the portfolio we created is very much an index.

Whaaaaat?????

Actually, looking for a mechanism to compensate for overvalued stocks sounds like a good idea. He sounds to me like a pretty smart guy and perhaps a bit of a bs artist.

[jIM_Ohio]

index is a loose term.

I think most people which buy index funds like the fact it is a passive investment with low fees which gives average performance.

But index, in and of itself, can be built many different ways.

The S&P 500 is the world's most popular index, it is made up by a committee of people.

The Wilshire 5000 and Wlishire 4500 are indexes which represent the whole market. I assume there is a committee somewhere putting stocks into these indexes... in the case of the wilshire 4500 there are valuation metrics which come into play.

The Russell 2000 is a small cap index which has valuation metrics built into the index. I still assume there is a committee somewhere making decisions, but they have to abide by the metrics when selecting.

S&P has a mid cap 400 index and small cap 600 index which mimic the Russell 2000 as well.

The issue is most of these indexes, except the S&P 500, have metrics associated with them, yet the S&P 500 is the most popular. Yet the 500 companies in the S&P are not the biggest, they are not the fastest growing, they are not the most profitable- they are arbitrarily chosen.

Then the average performance of these arbitrary companies becomes the proxy for how most investments in the stock market are measured.

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The issue is most of these indexes, except the S&P 500, have metrics associated with them, yet the S&P 500 is the most popular. Yet the 500 companies in the S&P are not the biggest, they are not the fastest growing, they are not the most profitable- they are arbitrarily chosen.

Then the average performance of these arbitrary companies becomes the proxy for how most investments in the stock market are measured.

Very true. Look at how many people follow the Dow (30) index. A completely arbitrary selection of 30 large cap stocks. Their stock price is partially propped up just because they happen to be included in an arbitrarily-selected index.

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I don't disagree with the assessment at all, and I doubt even index fans out there would either.

The only thing I want to emphasize is that, in the case of Vanguard for example, the average returns are somewhat lifted through the guarantee of very low fees and having no loads. After all, the very design of arbitrary picks in order to minimize expenses, coupled with the desired NOT to beat the market is exactly the purpose of an index fund. Depending on who you ask (and their investment preferences), this can be viewed as either a strength or a weakness.

In terms of net gain, I don't think it performs all that badly. Personally, I think it makes for a good foundation to build your more aggressive investments on top of.