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Comment by jstummbillig | Hacker News Reader

> just that nobody knows

I don't understand. Guilty until proven innocent, because they... are too successful? What could possibly be the generalizable idea here?

Should we have a speed limit for too successful companies, even if they might be doing super valuable work? Who would we trust to be the judge of the potential havoc that bad capital allocation in such a moment might cause?

EDIT: To be more clear, I don't have any particular qualms with the S&P committee maintaining it's position. That part I find mostly interesting and goes towards the second paragraph.

The first one is reserved for the quote, which I do have qualms with. "Nobody knows" feels a bit weak when the implication, that someone could be doing something illegal, turns into a guiding principle.

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These companies are allowed to go public and anyone can buy their shares.

Since the start, the S&P 500 has had a simple and consistent profitability screen. Your company must be GAAP profitable in the past quarter, as well as for your past four quarters when summed up.

The S&P 500 committee isn’t targeting these companies. They are simply choosing to keep the rules they’ve had in the beginning. And when these companies can deliver one year of profitability, like every single company added to the S&P 500 since inception, they too can join the index.

Refusing to change longstanding rules that make sense (remember: companies are supposed to be profitable!!) isn’t unfair.

> companies are supposed to be profitable!

No, companies are meant to be successful.

"Profit" is surplus money that could have been invested earlier in R&D, product development, employee benefits or customer service.

Instead, many companies decide to forego developing themselves for the 'advantage' of a 'record profits' headline and the privilege of giving a quarter of the surplus away as tax.

The headline should actually say “S&P 500 index maintains existing rules for inclusion” They are not actively rejecting any of the three companies, any of them can join the S&P 500 once they meet the inclusion rules, but none of the three companies meet the criteria at the moment.

It’s not active rejection, they simply don’t meet the criteria to join the S&P 500 yet. The inclusion rules don’t completely prevent garbage stocks from being added, but it helps keep out the most egregious frauds, but even then an Enron will happen every so often.

they aren't being specially punished. they are being made to follow the rules that quickly to every other company that IPOs. These rules aren't arbitrary. They exist because without them, retirement accounts would be vulnerable to companies doing all sorts of nonsense to manipulate the indexes.

That might be a valid motivation for keeping the rule, but as far I can tell it can't be the original reason for this rule as it predates passive indices in retirement accounts being that popular.

How do you know they are successful? The normal way we judge that in companies is with several quarters of public financial filings, independently audited and following GAAP standards.

“Innocent until proven guilty” is for the courts. It doesn’t apply elsewhere.

If somebody comes up to you on the street and claims to be the wallet inspector, should I cry “guilty until proven innocent!” when you refuse to hand yours over?

These rules ensure some stability before a company gets included in an index. That’s all. No company has a right to be included just because of their valuation at some moment.

More like its a regulated space and it makes basic sense to have regulations

Stock index composition isn't really a regulatory issue. S&P can make their own policies about what to include or not.

if you can't maintain success for 4 quarters then you weren't really successful.

And even if it's not in the S&P, you can still just buy the stock.

Exactly. With the standard rules, it is easy to buy the stock to opt in. If they change the rules, it is very hard to opt out if your portfolio follows the S&P500, like many passive investors do.

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