How to beat the easy way

sexta-feira, maio 02, 2014 David Barradas 0 Comments

A capitalization-weighted index explicitly links the weight of a holding to its price, so the more expensive a stock gets, the bigger its weight in your portfolio, says Research Affiliates' Rob Arnott. 

I have read some years ago a good and easy way to beat the stock indexes.

Here is the logic that i copy from Rob Arnott. In a hypothetical world there are only 2 stocks and both have a real value of 1. 
Stock A is overvalued (expensive) and it's trading at 3. Stock B is cheap and is trading at 0,5. In our world stock A has a index weight of 86% (3/3,5) and stock B has a weight of 0,5/3,5=14%. 

If stock A and stock B slowly drift back to their value of 1 our index has a lousy performance because stock A has a big weighting.

This is the reason why S&P equal weight beats S&P in the last 14 years


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