DP doesn’t sweat the details:
For someone who loves to periodically crow about how brilliant he is, and who usually demonstrates the truth of that, today’s column on measuring the stock market based on indices was amazingly naive and stupid. Anyone who would invest in the group of stocks making up the Dow in 1965 and never make any trades, which is what your analysis assumes, would have to be dumber than your column. The same is true for anyone who would invest in the mix of stocks making up the pre-2000 NASDAQ and never make changes. No one ever does that. The way most people invest is through mutual funds. The most common way of tracking performance of any fund is by comparing it to the index which most closely mirrors the fund’s investment objective, and that comparison includes the changes in the appropriate index. Many funds perform better than their comparable index, even with its changes in composition (the composition of the fund is also constantly changing–that’s why there is a fund manager), and when the fund’s performance is significantly less than the index, it experiences a mass exodus of assets.
DP somehow manages to completely miss the point while inserting his foot in his mouth, which is that historical analysis by index is misleading because investors BUY INDIVIDUAL STOCKS, not because they occupy themselves constructing their own little index-matching funds. Furthermore, around 88 percent of mutual funds underperform their index of comparison, and while 12 percent may be “many” it is certainly not “most”.
Theory is a fine place to begin, but one has to learn to abandon it in the face of actual evidence.