CARPE DIEM: Eugene Fama, Jr. on Efficient Markets

Sunday, June 14, 2009

At 6/16/2009 2:52 PM, gettingrational said...: This post deserves a comment. These four videos are very good to watch for the owner or potential owner of indivdual stocks or mutual funds.

The S&P 500 Index is chosen by a committee of seven. There is the Chairman, David Blitzer, and six secret employees of Standard and Poor. The index has two fundamental factors: Low turnover to reduce costs substantially and captialization weighting. If a company in the 500 has its capitalization go up then its weight in the index goes up relative to other 500 stocks.

Total Market indexes cover large captilization, mid-cap and small cap stocks. Thus total market indexes include a formula for "value" stocks and capitalization in mid and small stocks.

The point of this is that there is subjectivity in choosing stocks and the weighting in indexes. Indexes provide a low expense way to invest for the very long run with a little stock picking management.