Subject: Re: What’s the better value rn, brk or qqqe?
GTR1, equal weight Nas 100 extended back to 1972. https://gtr1.net/2013/?!N1TE
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GTR1 market cap weighted Nas 100 back to 1972. https://gtr1.net/2013/?!N1T
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No doubt your screens are right, but just my own personal take on this subject...

First, a geeky note, the Nasdaq 100 is not market cap weighted, nor float-adjusted cap weighted. When something gets too big (highly discretionary) they cut its weight back, then when its market cap inevitably shrinks back it shrinks back to much less than cap weight, then it happens again...the weights are all messed up.

But more to the point, I suggest that nobody should ever be long or short QQQ, not as a fund purchase, futures, or options. Just forget about it. I also suggest that the historical return comparison between cap weight and QQQ weight is meaningless.

The reason is the wildly huge (and weirdly unpredictable) concentration of QQQ. The fact that it outperforms equal weight or underperforms it in any given month or year or decade is almost entirely random: it's the luck of the draw of how the stock prices around 4 companies are doing at that time.

If you know enough to decide that you understand the economics of those few truly gigantic firms, you should be investing in some or all of them (long or short) individually, not letting the rules of QQQ pick your weights and direction. If you don't know them enough to predict them (and they are notoriously unpredictable, so that's likely the case) then you have no business expressing an opinion or betting money on the direction of their prices, which is to a too-large extent all a position in QQQ is.

So, the best way to think of it is: QQQE is a good characterization of this class of companies. No tail is wagging the dog: no position is over 1% of the collection. The aggregate earnings therefore trend quite well, so the valuation level isn't hard to assess relative to history. And the rate of growth of good old fashioned profits has been both smooth and rapid for decades*.

The returns of QQQ in any period are the returns of QQQE (a thing which makes some sense), plus or minus a really huge random number. The earnings are a different random number, so it's near impossible to peg a range for valuation level relative to history. Consequently, using QQQ is just sentiment gambling.

But what about the desire to have a big holding in the big stocks because they're winners? This has been a very tempting idea lately, because it has worked lately, but on average over time the few very largest firms considerably underperform those that are merely very big. The recent stretch of gigacap outperformance is an anomaly. I have no idea how long the anomaly will last...forever?...but someone thinking it's a law of investing is betting on "it's different this time".

I think there is a good case for individual stocks selected judiciously from this group (by knowing the firms, or via quant methods), or buying them all as an equally weighted slate via QQQE or individually, but there isn't any case for QQQ. Its only advantage is liquidity.

I don't own QQQE, but FWIW I am currently running an equally weighted quant screen that selects from among the Nasdaq 100. It picks only a few high flyers, acting as a little yeast for the portfolio. Not *everything* has to be as boring as Berkshire.

Jim


* There are big earnings dips in recessions, but the average earnings of this group tend to bounce back to the old trend pretty promptly so it's best simply to ignore the dips.