Is the S&P 500 Broken? | Hacker News Reader

Is the S&P 500 Broken?

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55 pointscalcifer36 comments

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.

> 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.

I don’t think this is quite right. The article is observing that weighted indexing goes against the ethos of pure passive investing, since it overweights the bigger companies and exposes you too more risk in the event that one of the highly-weighted stocks takes a big hit. This is a choice that folks might not be intentionally making. If you become aware of this exposure and decide to opt for a an equal-weight index, you aren’t engaging in “active investing”. Quite the opposite.

Exactly this. There was a time I tried diversifying from mostly FDN (tech only) to include VTI (S&P) to still trend growth. And eventually realizing these indexes are mostly the same, switched the lower-growth side to include VT. But I find even that, while not as much, is still dominated by the same companies. I would say these two are the vanguard of passive investing (pun intended) but are not working as they used to at diversifying. It might not matter though given these big companies seem too big to fail at this point and some growth is still desired, cash doesn't seem far worse than equal weight indexes at least for now.

I suspect everyone is saying the same thing, S&P isn't broken, it's not as diverse as it may have been, but that doesn't mean it's something to avoid when doing passive investing, knowing it's not quite diverse would be a plus though.

I agree with this except the “if you change weights on your index fund you’re an active investor.” Granted it is taking action, but not to the level of someone who is picking stocks regularly. It’s like calling me an active investor because I choose my risk profile for my 401k, which would make everyone an active investor.

"Passive investing" is a largely beaten-to-death turn of phrase because you can't truly be a passive investor in anything. Every "passive investing" focused fund has some degree of selection bias, because the index itself is arbitrarily declaring that it's only buying the "top 500" or whathaveyou. So you're "passively" investing in the top 500 companies, which means "actively" choosing not to invest in the rest.

You can go one level up from there and buy VTSAX if you want to buy everything and truly "passively" invest in US stocks, but again, you'd be "actively" choosing not to invest in international stocks then.

It's turtles all the way down.

You’re better off buying the whole market than picking stocks. You’re better off buying and holding than trying to time the market. Splitting hairs with regards to the definition of ‘passive’ doesn’t change these simple facts.

Passive investing remains the best path for the middle class to financial security and comfortable retirement. Spreading your ignorant navel-gazing on this matter could potentially do real damage to real people’s financial futures. Please stop.

Historically equal weighted indices haven't almost always underperformed according to the article. Actually the recent unusual divergence is a focus of the article. They note that historically the divergence is -0.17%, i.e. the opposite of always underperforming.

In fact, coming at investing from a fundamental/business perspective where one is seeking to buy companies at as low a valuation as possible relative to earnings, equal weighting should systematically tilt more toward cheaper companies which should have slightly higher expected return. Market cap weighting tilts towards companies like nvidia whose valuation is ballooning.

> just know that you'll almost always under perform but usually have less volatility.

I’m really not sure this is right at all.

This is such a contradictory comment.

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.

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.

(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.

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.

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.

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.

Are they profitable because of their monopoly power? If tomorrow the US and the rest of the world passed more stringent data privacy laws, would they still be that profitable?

Seems like there should be some alarms sounding when a handful of companies carry a stock index like this. Not something that should be celebrated.

Ad pricing is a scam and AWS and Azure make money of abstractions and JS being bloated. There is no way Ford is less valuable (70 times) than Microsoft which you could replace with Ubuntu and LibreOffice.

It doesn't make any sense. It is a psychosis.

Ubuntu had the goal to replace Windows since it's inception. It's literally Bug 1 in their database. And yet, it still hasn't happened. Do you really want to argue that billions of people are all mad, stupid or have a "psychosis"? Or could there be, maybe, just maybe, a reason besides psychosis that people continue to use Windows and Office?

Ubuntu may have failed to replace Windows/Office, but there are more significant threats to Microsoft's market.

Some big companies (like the one I work for) are scrapping MS Office and Teams and moving everyone to Google Workspace.

Consumers who only use computers for web browsing are less likely to need Windows PCs - they could switch to Chromebooks, iOS/Android tablets or phones.

I am sorry. I meant the valuation of Microsoft (and big tech in general, compared to say Ford) is a psychosis. Not that people want to use Windows over say Ubuntu.

on the whole i agree with you, but pragmatically these companies generally hold most of their markets hostage in monopolies. yes, windows can be replaced with linux distros and office with alternatives, but in reality this will not happen for at least 5 years, and microsoft will continue selling a licence with every personal computer sold during that time. google (the product) is replaceable nowadays by for example kagi, but in reality it won't. for as long as this is true, these companies can extract a lot of money from their users without consequence and their stock price will reflect that.

ford, to take your example, could be replaced overnight if for example another pinto happens and users wil both still have their cars and be able to buy new ones from other manufacturers and the power vacuum will be relatively minor.

if tomorrow microsoft dissolves through an act of god, the power vacuum of "who will get $100 everytime hp, dell et al sell a computer" will be gigantic.

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.

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.

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.

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.

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.

98 was very different in how much regular people where pumping up the stock market.

Exactly, if the author would have looked at least at PE ratio the conclusions would have been different. Seems like amateurish writing

If it is a bubble what can take the wind out of the sails? A few experts screaming about it doesn't seem like it will be enough.

Baby boomer mass retirement. This will increase the selling of shares across the board, since boomers will need to liquidate their assets to finance their living expenses when they are no longer taking salaries.

Sounds plausible, any idea what proportion of the large index funds they are thought to own? In the same vein, I wonder if pension funds can pose a risk or if they are self perpetuating enough to not cause any fire sales.

Baby Boomers have been retiring for quite some time already. The Baby Boom was from 1946 to 1964[1], so the oldest Boomers are now 77 (well past the usual retirement age) and the ones in the middle are around 68 (many have retired already).

[1] https://en.wikipedia.org/wiki/Baby_boomers

Thanks for owning pension funds that I can short and get rich from.

Interesting take. I would like to know more about shorting pension funds and pension funds in general. Got any links?

Read Goldman’s Prime Book reports… and similar… like BofA flow desk..

OP meant 90% of the market is now dumb money - CTA, L/S HF, macro, passive funds etc. Actors that have to stick to certain script outlaid in their strategy - which makes market easily predictable and profitable for active investors.

Last two years market is consistent and profitable for actors that use gamma and flows… Before it was Vol cycles… and so on…

NB according to GS Prime we are right now in a distribution phase on Tech stocks… [retail buying, smart/fast money selling]

You know way more than me. I wasn't even looking at this. Never even heard of it.

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