Subject: Re: Bessembindar update
And how do you square this idea with the observation that stocks dumped from an index tend to do better, not worse, than the average?
...
Do you happen to have any references about stocks performing better after being removed from an index?


It's a very big effect. Even though it hits only a small minority of stocks in an index, it has a material effect on the index as a whole.
Here's one random article from Research Affiliates.
https://www.researchaffiliates...
A salient paragraph:
" fully half of discretionary deletions finish the subsequent 12-month period ahead
of their effective closing price relative to the market. Because the gains tend to be
significantly larger than the losses, the discretionary deletions beat the market by
nearly 20% over the next 12 months, on average. As a result, in the first six months
following the rebalance, the additions tend to lag the deletions by 14%, and by month
12, the additions lag by 20%."

(this is another older article of theirs on the same subject https://www.researchaffiliates...
Short summary: "The additions WIN BIG before they're added; deletions LOSE BIG before they're dropped. The pattern reverses the year after an index change." )

They mention the overall effect and its magnitude, and go into detail on the specific replacement of AIV with TSLA a couple of years ago.
After the swap, TSLA dropped like a stone and AIV did wonderfully. This specific example is just one story, but it's entirely typical.
(in the subsequent six months, the entire index was 0.41% lower than it would have been had this single swap not occurred)
Remember that conventional market-wide cap-weight indexes are big outliers in terms of [bad] performance: almost any other portfolio weighting method you try will usually do better, most obviously equal weight.

But my comment is more general than this [relatively] short term effect: only relatively plausible firms get added to an index, and sometimes firms that are in the process of going bust are ejected from the index before that happens.
(Certainly not all losers are caught...for one thing, index membership is not updated that frequently...but eliminating even a few very bad outcomes is nice)
Consequently, using index membership as your hunting ground for a roll-your-own broad sampling portfolio can perform a valuable service to
(a) eliminate at least a few particularly bad outcomes, and
(b) introduce newly-plausible firms.
The outer non-index hinterland of the markets is full of a lot of stuff that is not really made up of suitable investment candidates, for a wide variety of reasons.

If you wanted to make best use of both effects, I suppose you could use as your eligibility list "anything that was in a major index six months earlier and is still trading"
(the "still trading" bit is because you don't generally want to invest in things that are in the process of being bought out)

Jim