Subject: Re: Barron's ... oops. market not that overpriced
Sometimes I'm not sure I understand everything you write

Well, don't assume it all makes sense. Mainly I'm an excellent typist.

Some short points:

Empirically, there is a whole lot of historical observation evidence that an equally-weighted broad market portfolio will outperform a capitalization weighted one. In most 5-year intervals, and overall. It has led in the past for so long that it seems likely to continue. So if you believe otherwise, you should have a very good reason to hold that belief.

Even without historical back-up, there are sound theoretical reasons to think equal weight will do better. At any instant, a cap-weight index (and all other weightings with effectively constant share counts) is overweight whatever is most overvalued, and underweight whatever is most undervalued. An investing lifetime is made up of a string of moments, so that's the drag over the long haul.

Separately, the S&P 500 index since 1989 (and the Russell 1000 since forever I think) have a very serious problem: index additions and deletions are pre-announced, front run, and cause a scarily huge penalty. If you're going to follow the S&P 500, do it yourself; buy all the stocks in proportion to market cap (or any other weighting you like), but follow index changes only after at least 6, preferably 12 months.

An equally weighted strategy has a small fraction of the company-specific risk. If one of the biggest firms in the S&P 500 went "pop" tomorrow, it's the cap-weight folks who would be licking their wounds, as they had (say) 3-7% of their money in it rather than 0.2%.

An equally weighted strategy is never overweight an overvalued large cap, or a set of them. History shows that this is a situation which frequently presages very bad returns from the index for very long stretches. An equally weighted strategy will also do poorly in long bear markets, but not THAT poorly. In the ten years March 2000 to March 2010, the equal weight real total return beat the "standard" S&P 500 by a remarkably 6.55%/year. What is rather less appreciated is that it also beat the cap-weight S&P 500 in the ten years ending the tech bubble in March 2000, though only by 0.39%/year.

Cap weight has been the big winner lately, for sure. Things may indeed be different this time, to some degree. And there is no reason the advantage of equal weight has to be as big in future as it was at particular times in the past. Still, the evidence suggests that it seems more likely than not that the recent advantage of cap weight is likely to go into reverse to some degree at some point, so equal weight is the safer and smarter bet at this juncture.

It's all academic for me, as I consider index investing immoral. There are firms that I won't invest in for ethical reasons, and they are in most any index I might try to track. What was it Charlie said about raisins and turds?

Jim