Timothy Siegel

The Problem With Designer ETFs

Dividend Growth Investor

I greatly appreciate that you did not call my posting "flapdoodle." But, if I understand it correctly, I disagree with your statement that "companies that could... ." At any moment we only know what companies have done in the past, and so a company that in the past has consistently increased its dividend, might not in the future. If enough investors start to invest based on consistent dividend increases, those companies that are forced to refrain from a past pattern of dividend increases could really get clobbered when all the dividend increase investors sell en masse when a good dividend pattern is discontinued. Also, high yield stocks tend to be vulnerable to rising interest rates. My thought is that an investor is always better off looking at everything. The best way is to observe some relationship that others have missed. I just don't see how you can hope to beat the market by being part of some huge crowd of dividend growth investors, as it seems to me that this investment philosophy has really grown in popularity over the last 10 years, and might be cresting.

The Problem With Designer ETFs

Panskeptic

"Flapdoodle"!!!!!!!???...

I just have one basic answer, and that is: We are talkin' money here. Yes, market cap is flawed, it is horribly flawed. It has all the flaws you list. But we are talkin' money and so there will be a constant, continuing financial incentive for all players to break away from dogma and to see the falsehoods and respond. And, Timbo's rule 54.28.3, states that "People respond to financial incentives."

Market cap is the worst, except for the rest.

The Problem With Designer ETFs

Smart ETF

Most of what you say, I agree with. But remember: I say that Market Cap is the worst system, except for all the rest (credit: Churchill). With respect to Simons, Tudor and Robertson, we really don't know how they beat the market, and to what extent they rely on weighting models, because they are extremely secretive. I accept that you construct models that beat the market for decades, but my guess is the market performance that you beat is pre-model construction. I can certainly accept that with a rearward view, you can construct models that beat the market for many decades of the past. But you are not the only one who is observing the past. Others will also respond, and this will tend to destroy those same relationships in the future. Also, my suggestion for weighting the market caps is highly qualified with, "let us theorize that there actually is some attribute ... ." I only suggest that as a superior alternative to weighting by other alternative weighting schemes that have been developed.

Also, with respect to my democracy statement, I state, "except for resulting from a process in which each dollar, rather than each eligible person, gets a vote." So of course it is one in which the big money players, or "fat cats," are weighted much more than the average investor.

My basic point is that every observation that you make about the market is made by others, too. So if you construct an index that takes these observations into account, your index must contend with other indexes and market actions of others who have made the same observations.

I would like to make one qualification, however. Rather than saying "the best minds" I should have said "the best minds that the big money players have identified." There could be way better minds out there, that have just not been identified by the big money players.

Also, if you constructed an index, decades ago, or even a single decade ago, that has consistently beaten the market since then, I would be very, very interested in seeing it and seeing how you did that.