Re:Scott Adams startup idea: find unique diversified stock b...
by joshu on Wednesday November 05, 2008 @04:02PM
(#354955)
Eh. Flimsy logical reasoning. "X would nearly mimic Y" in paragraph 1 becomes "X is the same as Y" in paragraph 2.
You want a very broad basket of stocks. The broader, the better to minimize risk. The SPX already is a subset replacement for "the market" in general (500 vs 9000 stocks.)
Sure, you can approximate with a smaller set, because everything is inter-correlated. Except when it's not (earnings data in an individual stock, etc.) The other issues here are: market cap (some stocks are MUCH bigger than others); trading impact (just because a stock trades some way doesn't mean you won't move it by investing in it, etc) and so on. And at the end of the day, you're just mimicing the SPX. You can get SPX performance for a lot less effort. Even SPDRs are only 18 bps of management fee.
Finally, the point of the fancy finance that he rails against is that people aren't looking to duplicate the SPX, they are looking to beat it. It can be done.
You want a very broad basket of stocks. The broader, the better to minimize risk. The SPX already is a subset replacement for "the market" in general (500 vs 9000 stocks.)
Sure, you can approximate with a smaller set, because everything is inter-correlated. Except when it's not (earnings data in an individual stock, etc.) The other issues here are: market cap (some stocks are MUCH bigger than others); trading impact (just because a stock trades some way doesn't mean you won't move it by investing in it, etc) and so on. And at the end of the day, you're just mimicing the SPX. You can get SPX performance for a lot less effort. Even SPDRs are only 18 bps of management fee.
Finally, the point of the fancy finance that he rails against is that people aren't looking to duplicate the SPX, they are looking to beat it. It can be done.