I have previously shared with you my view that the increasing prevalence of index funds creates some market distortions because investors perpetually buy stocks based on market-cap weights rather than fundamentals. When a business owner sells his $10 million business and puts $6 million into the S&P 500 Index, he is placing a buy order for $180,000 worth of ExxonMobil stock automatically. It’s the nature of the programming behind the index. Exxon is the second-largest business domiciled in the United States based on market cap, and all buy orders reflect the fact that Exxon Mobil’s market cap of $300+ billion is about 3% of the $15+ trillion stock market index.
Whether oil is $50 or $100, or the oil giant’s profits are high or low, you are purchasing the stock if you hold investments keyed to an index. This by definition corrupts the principle of fundamental analysis because people aren’t … Read the rest of this article!