Revenue Weighted Index

[jc3900]

For a reference, check out VTL TIGERS

In my mind, Revenue is the best way to index the entire economy. What do you guys think about indexing by revenue.

[humandraydel]

Certainly not a bad idea. I'd say that it should probably be indexed by PROFIT though (for hopefully obvious reasons). It sort of already is though. XOM is the biggest in market cap and revenue. GE is second biggest by market cap and must be up there in revenue too. You don't get to be one of the biggest in market caps without massive revenue.

[jc3900]

humandraydel: It's not about buying single stocks, it is about buying the market. What works for single stocks is not necessarily true for the entire market. Of course I would never ever recomend buying a company off large revenue, that is just stupid. If you say on average the market will go up 9%, then you must find a way to buy the market to realize the 9% return. The best way in my mind is revenue because revenue is in essence the factor that determines how much of the economy is pulled from that company.

[humandraydel]

Companies are typically priced based on earnings (or profit), not revenue. A company that makes $10B on $20B of revenue is worth more than a company that makes $5B on $40B of revenue.

[money2008]

Isn't the projected growth in profit more important than the absolute profit? A company with higher profit growth estimates has a higher pe ratio than a company with much higher profit but lower growth estimates.

[jc3900]

Can you guys please go to this link before you dispute. Compare income vs. Revenue at this page. VTL TIGERS And yes I know applying revenue to individual stocks makes no sense but if you want to buy the ENTIRE MARKET it makes sense.

[humandraydel]

Okay, so on back tested data, weighting by revenue returned slightly more than by income. Big deal. There is certainly no guarantee that revenue weighting outperforms in the future. Plus, your own link even says a con of revenue weighting is "Bias in favor of low margin industries." You have given me absolutely no reason to believe revenue is better, you just keep repeating "But it makes sense for the entire market!"

[jc3900]

humandraydel: I gave you a study of some 40 years that showed revenue outperforming income. I would say that is pretty good evidence for revenue. I really doubt it is a statistical anamoly too. I believe revenue is vary good for indexing in the way that it captures the entire market. Furthermore, it returned the highest compared to any other figure.