Post #107
Part 4: Good Advice, Bad Advice, and News About Investment People (continued)
Fundamental Indexing
Here is a good explanation about fundamental investing
written by William Bernstein:
Fundamental
Indexing
As you can see, Dr. Bernstein does not always write things
that are comprehensible to us mortals.
I read it five times and I only understood the small words. But the jist of his article is:
- Regular
index fund managers decide on how much of stock XYZ to hold in the fund
based on the stock’s market capitalization (how big the company is). So the bigger companies have a
bigger presence in the index fund.
- Mr.
Arnott and friends believe that this is wrong. They propose using things like aggregate earnings,
sales, book value, dividends, and employees to decide how much of a
company’s stock should be in the index.
- By
using these other factors, the index kind of tilts toward value stocks.
- Dr.
Bernstein’s conclusion is that there may be a slight improvement in
performance, but it might be more expensive to manage an index fund like
this. The additional costs
for managing the fund could outweigh any increased return.
Mr. Arnott is marketing fundamental index funds to investors. Apparently there is quite a
wrestling match going on between the index fund establishment and the
fundamental index fund crowd. Read
this article for some entertainment:
Talking
Business - Passions Run High on Indexing - NYTimes.com
Even stuffy old guys who spend their days talking about
money can get crazy mad at each other.
Picture Andre Perold (AKA Kimbo Slice Kimbo
Slice Fights ) going up against Robert Arnott (AKA Justice from the American Gladiators TV Show )
in a financial winner take all.
I’ll bet a whole lot of CPAs would put down big money to see that one!
In any event, you should know that there is something called
fundamental indexing in case you ever get to be a contestant on Jeopardy. Is it better than normal indexing? As Dr. Bernstein says, it depends! For your purposes as an investor, stick
to the regular index funds. As
noted in the Times article, regular indexing comes the closest to matching the
returns of the market, and that’s our goal.
Comments