I see the error in my thinking here. My suggestion of rebalancing loses the high end component of variance while avoiding the 0 value case.

I guess im just too cynical to believe a company can operate indefinitely with indefinite growth!

if you rebalance / repick, yes. If it's just buy and hold, I don't agree. The benefit of index funds is the failing companies are dropped before they hit $0.

That seems like a strange perspective to me. All of the theoretical justification for passive investing (you get the average return without the fees, maximum diversification, etc.) implies that you'll get the best result from holding every possible security in some proportion. You're saying that index funds work not because of any of that, but because they've observed a market inefficiency (low market-cap or recently-fallen stocks underperform the market), and make an active decision to deviate from the market portfolio in order to exploit it. Why believe that there's exactly one easily-exploitable market inefficiency, but no others?