from Hacker News

Is the S&P 500 Broken?

by calcifer on 11/25/23, 10:26 PM with 36 comments

by chollida1 on 11/25/23, 11:19 PM
Look, you have to decide if you are passive investing or not.
The point of the article is that tech, specifically the big names we all know, account for the vast majority of the indexes gain this year.
They are asking if you should go against the index weighting and do your own weighting so you aren't so heavy on tech, but again, that goes against the ethos of passive investing.
If you make a change like that then you are an active investor.
So just decide if you are an active or passive investor and let that settle your path.
If you chose a market cap weighted index then there will always be outliers, just because right now there are a few in tech doesn't mean you should throw away your passive investment thesis and go active to avoid the gains you make from them.
Remember, these companies are not speculative, they are making gains because they are making money hand over fist.
That just seems like a bad move.
If you don't want outliers then chose an equal weight index, just know that you'll almost always under perform but usually have less volatility.
by shrimpx on 11/25/23, 11:35 PM
The market has become fairly predictable, with the big tech companies being agile enough to hop on every new trend and expand their monopoly power in there. Until there's a massive disruption, the trend will continue.
Disruption would come from some radically new startups, such that these incumbent companies are either blindsided or unfit/unprepared and fail to monopolize the new markets. Disruption could also come from government, by breaking up megacompanies -- unlikely in the US but possible in Europe.
by break_the_bank on 11/25/23, 11:24 PM
Can’t comment if the index is broken or is functioning as expected. The answer would be different based on what your time horizon is; pretty sure S&P 500 is highly up since the 1998 peak. It’s at 4500 compared to 1300~ at its peak in 1998.
It will be broken(temporarily) if Nvidia(or take your pick) starts crashing but you might still do better than betting on an individual stock.
by HenryBemis on 11/25/23, 11:37 PM
(not a financial advisor) I was reading somewhere that the favorite book of Warren Buffett is "the intelligent investor". I got a copy and I read it twice. I also like Dave Ramsey's methodology. I then decided to follow the "dollar cost averaging". I "buy" every month a set amount (6 different ETFs -including VOOG- and some tiny amounts on a dozen stocks). I don't care if they are up or down this month, I just see the whole portfolio. If they go down, I am actually happier because I more with less. It is true that not every of the 500 weights the same, and (personally) I can live with that. I read the article trying to see something juicier, that could force me dump my VOOG but no... With my "plan" of buying and closing/selling in 20years (or even leaving it as inheritance) it is as sure as a bet can be.
by depingus on 11/25/23, 11:27 PM
I wouldn't go as far as to say the index is broken. It's probably working as intended. It's just there are nuances like this that most people don't consider. "Looking at the share of market cap the seven largest companies are now a disproportionately large share of the overall S&P 500 at 29%..."
Most people invest in an index so they don't have to worry about diversifying with individual stocks. A misstep from 1 of these 7 companies and the whole index takes a massive hit. Which would probably be a huge shock to index only investors.
by friend_and_foe on 11/26/23, 6:01 AM
The s&p 500 is a strategy. Like all strategies of attempting to predict the future based on the past, it's success ends one day. Something fundamental changes and humans don't adapt, we keep doing what worked until failure is staring us in the face.
Not that it has failed. The goal is not to give the highest returns available, but the highest risk adjusted return with symmetrical information, and that is precisely what it does.
by 0xDEF on 11/25/23, 11:17 PM
The .com bubble was driven by tech companies that were unprofitable. The current rally is being driven by some of the most profitable companies in modern history.
by hankchinaski on 11/25/23, 11:26 PM
Returns are driven by earnings growth and valuation expansion . The article only looks at a specific time frame which favours significantly the rebound of tech. Looking at a longer time frame the returns are also not as normally distributed across stocks, but buying the index is the best way to capture the market return in aggregate without being exposed to sector risk.
by sega_sai on 11/25/23, 11:48 PM
Even if all the top 7s valuation goes to zero (which obviously will not happen) then the index will go down only by 29% which is not much for an equity based index, so I don't think it's that big of deal to be honest.
by rightbyte on 11/25/23, 11:21 PM
I mean, Microsoft bought Blizzard via its faux umbrella company for a fantasillion dollars just for the merch. Like, the pretend money is real with those companies. There is no way there is any connection to "fundamentals".
Companies would be better of recruiting secretaries than paying big tech for cloud services. And ads are a complicit scam between Facebook/Google and external marketing departments.
by samingrassia on 11/25/23, 11:31 PM
If you want a good framework for understanding the composition & mechanics of why this is happening - do a quick google search of "Mike Green Passive Flows".
TLDR: SP500 + auto-enrolling 401ks + buying the index without valuation = That scene in The Sorcerer's Apprentice where the brooms won't stop filling cauldron.
by langarus on 11/25/23, 11:14 PM
It's really easy to compare the current situation with the 98. Burry has been calling out the index fund bubble for quite some time. In 98 there was a .net bubble which looks more to the web3 craze we had in the last years.
by shyn3 on 11/25/23, 11:26 PM
Thanks for owning pension funds that I can short and get rich from.