Catching up on the indexing debates
First, money manager Seymour Lotsoff argues (though the idea is not new with him) that the shear size of indexed assets presents a threat to the longstanding, well documented superiority of index (passive) investing over active stock picking. Of course Lotsoff is an active manager. And the blindfolded dart-throwing monkey has, no doubt, beaten him before. And the monkey will probably beat Lotsoff again.
Next, Andre Perold joins the Fundamental vs. Cap-weighted (read: Siegel/Arnott vs. Bogle/Malkiel) debate with his draft paper "Fundamentally Flawed Indexing." As Douglas Appell reports for Pensions & Investments:
Mr. Perold said the key point of his paper is that if nothing is known about fair value, then any stock, regardless of capitalization, is just as likely to be overvalued as undervalued. Consequently, holding stocks in proportion to their market capitalization doesn’t systematically result in performance drag, he said.
Quant managers who have seen Mr. Perold’s paper say it’s a strong argument. To make the case for fundamental indexing, you have to presume that “large-cap stocks are overvalued, and you don’t know that,” said Eric H. Sorensen, president and chief executive officer of Boston-based PanAgora Asset Management Inc.
On that note, I can't recall whether it was Benjamin Graham or Warren Buffett who said, "God almighty doesn't know the proper price-to-earnings ratio for a common stock." Maybe it was Burton Malkiel. Probably all three of them said it at one point or other. But that's not going to stop me from pointing out that, based on its historical mean P/E ratio, the S&P 500 still looks to be fairly valued at its current level, if just a little pricier than a couple months ago.
True, stock prices have risen, but so have trailing earnings and estimates of future earnings.