Allen has many bones to pick with John Bogle, most of which
seem to be some variation on the basic theme that hedge funds are a better investment
than index funds. Interestingly, he never takes issue with Bogle’s main point,
which is that index funds are a much better investment than mutual funds. But
he does pull out one very interesting statistic:
If you had bought the ORIGINAL 500 components and held on with no adjustments
whatsoever you would have outperformed the "real" S&P 500 even
though only 86 names survived the past 50 years.
It’s true that big indices are, almost by definition, overweight winners. The
Intels and Microsofts of this world have to comprise a large part of the S&P
500 and the Dow, otherwise those indices simply wouldn’t reflect the reality
of the markets. But you’d be wrong, it would seem, if you concluded that their
returns have been boosted as a result. The Dow drops Bethlehem Steel and adds
Microsoft? Great – but remember that it adds Microsoft only after that
company has already posted the vast majority of its gains.
Maybe a really long-term buy-and-hold investor should just buy 10
shares apiece of each stock in the Dow Jones Industrial Average, and hold on
to them all. I wonder how the returns would compare to those of the Dow itself.