No. of Recommendations: 10
Tl;dw - Ben thinks equal weighting is an inefficient way of getting at smaller/cheaper stocks.
I think of it primarily for two advantages:
* Far more diversification than cap weight offers, along with very much lower company specific risk, and
* never overweighting overvalued super-large-caps, sidestepping any/all bubbles in that area.
The observation that it gives higher returns over the long run both theoretically and empirically (except during an occasional ongoing bull run-up of valuations in super-large-caps) is almost a side benefit.
To me, deploying capital into the S&P 500 is intended as a strategy for the "no nothing" investor. I don't mean that to mean a stupid person, but one without any above-average ability to analyze stocks. To me it's absurd to think such a person should put 37.5% of their life's savings into just 9 stocks, over 26% into just 4.
Consider: a non-specialist has no differential views about the prospective returns of one stock over another: they're all the same. What would the "Kelly criterion" rule advise for that person as a position size for, say, Apple, relative to others? *
Most importantly, spreading the money around works just fine. Ignore those deeply misleading studies about all the long run gains coming from a few knock-out winners. The chances of any S&P 500 firm making a total return profit in any given 3-month stretch is 58.80% in the last 69 years. That's enough of a tail wind to give a reliably positive real return over time.
Jim
* trick question - Kelly rule recommends that a person with no edge should bet nothing
