Indexing By Committee

I would like to thank the Standard and Poor’s Indexing committee for delivering the gift of consistent index re-balancing.  I would also like to thank the financial media for confusing the hell out of the average investor about what the addition or deletion of a company into a major index will mean for its future prospects.  Below are the additions and deletions for the S&P 500 index that will occur on the close of December 17, 2010.

We have a special situations strategy tied to events like these.  I wish I could get into it, but unfortunately, it’s 100% proprietary.  That means I will never discuss it in public.  I can’t take any credit for creating the strategy, it was developed by a friend and colleague.  I will say that it is brilliant in its simplicity and effectiveness.

Below are charts of companies entering and leaving the S&P 500.



Here are a few contradictory articles written for for the same event, just to stir the pot and get everyone nice and confused.

Netflix and F5: New breed of hot S&P 500 stocks (CNN Money)

Netflix Added to S&P: Sell Signal? (WSJ)

Notice anything interesting about the companies going into the index?  All of the companies going into the S&P are moving up the chart from the bottom left to the top right.  All the companies leaving the S&P (with the exception of KG) are failing businesses whose stock is doing nothing but capturing opportunity cost of their investors.  Regardless of how you “feel” about NFLX and its business model, you can’t deny that the chart is moving up, making investors very rich in the process.  This is as good a time as any to remind the bears that the game is rigged against them.  The most liquid broad index instrument in the world regularly kicks out crap underperforming companies in favor of new innovative outperforming companies.  How’s that for an upward bias?

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