Index investing and Board Composition
Ok this may be a long post and I must admit that I have not really thought that hard about either of these topics. And they may be discussed at length in academia, but I do not think that I have heard about it so here it goes:
Point 1: Index Investing. I was struck at the ASAP reunion/conference by all the talk of the small cap/large cap trade, and I was listening to my CFA equity analysis CD on the way to work today and I had this thought. When the market weighted S&P index funds add a stock such as Google, they move the price huge. That in and of itself makes the S&P index inefficient. And the fact that people like me invest in the S&P every pay check means that once your company is added to the S&P 500 it really is a no brainer, you are set for life. Because people add more and more money to the index every pay check, they are essentially driving the price of your stock no matter what your fundamentals are. And the bigger you are the more money that is allocated to you, the larger you get. And it is a quantum, you are either in the S&P 500 or you are not. There is no in between. So it has to be the most inefficient way to buy stocks. Which led me to believe that the act of indexing which was suppose to be good due to market efficiency, really leads to more market inefficiecy and really screws the index investor in the long run. I guess the next logical argument is that the hedge funds that arb it away by shorting market weighted, long equal weighted are canceling it out and making it safe to index again. I have not thought that far ahead.
2. Do you think that if real common shareholders sat on boards that things would go down like they have with CEO pay and other crap. It is my contention that every board should have 3-4 seats that are made up of real deal shareholders. Maybe it rotates every 3 years. Maybe there are some restrictions like number of shares, years of holding, etc. Maybe the shareholders have some popular style election. Whatever. But I think that this would solve a lot of problems. Why is this not the practice?
Point 1: Index Investing. I was struck at the ASAP reunion/conference by all the talk of the small cap/large cap trade, and I was listening to my CFA equity analysis CD on the way to work today and I had this thought. When the market weighted S&P index funds add a stock such as Google, they move the price huge. That in and of itself makes the S&P index inefficient. And the fact that people like me invest in the S&P every pay check means that once your company is added to the S&P 500 it really is a no brainer, you are set for life. Because people add more and more money to the index every pay check, they are essentially driving the price of your stock no matter what your fundamentals are. And the bigger you are the more money that is allocated to you, the larger you get. And it is a quantum, you are either in the S&P 500 or you are not. There is no in between. So it has to be the most inefficient way to buy stocks. Which led me to believe that the act of indexing which was suppose to be good due to market efficiency, really leads to more market inefficiecy and really screws the index investor in the long run. I guess the next logical argument is that the hedge funds that arb it away by shorting market weighted, long equal weighted are canceling it out and making it safe to index again. I have not thought that far ahead.
2. Do you think that if real common shareholders sat on boards that things would go down like they have with CEO pay and other crap. It is my contention that every board should have 3-4 seats that are made up of real deal shareholders. Maybe it rotates every 3 years. Maybe there are some restrictions like number of shares, years of holding, etc. Maybe the shareholders have some popular style election. Whatever. But I think that this would solve a lot of problems. Why is this not the practice?
posted by MattKelly54 at
7:12 PM
2 Comments:
Good question on #2. My guess is that a lot of shareholders don't want to the responsibility and that, while they claim that they are in it for the long-term, they really are in it for the price correction. No matter when that occurs.
It would lower my dollar cost on a few of my positions if I got director pay. :) Plus teleconference bonus.
You would have to be private on the name after being on the board I guess.
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