1/7 Thread: Bad reason to own the big tech
There are perhaps many good reasons to own the big tech, but one consistently bad reason that I heard is in order to beat the index, you have to own big tech because they have such high weight to the index.
There are perhaps many good reasons to own the big tech, but one consistently bad reason that I heard is in order to beat the index, you have to own big tech because they have such high weight to the index.
2/7 The "logic" goes like this: since big tech has such high weight in index, their performance drives the index. If you have no exposure to them and they did really well, it's very hard to beat the index.
This logic doesn't make much mathematical sense for most investors.
This logic doesn't make much mathematical sense for most investors.
3/7 It may have some rational basis if you are managing hundreds of billions. Since vast majority of investors aren't managing such amount, this argument hardly applies to anyone.
Let me explain with a simple example.
Let me explain with a simple example.
4/7 Imagine an index with 10 stocks which is even top heavy than S&P 500. Using this example, if you just invested in four largest companies i.e. stocks A-D, you would beat the market by ~70 bps after year 1.
5/7 If you invested in companies E-H, you would beat the market by 1195 bps.
It's so painfully simple that one might wonder what's the point of this thread.
It's so painfully simple that one might wonder what's the point of this thread.
6/7 The point is in every 1, 3, 5, 10 year period, there is many different combination of stocks in portfolio that could and will beat the index without owning any of the big tech. Even if big tech's weight to index increases substantially even from here, that will remain true.
7/7 Buying big tech isn't necessarily closet indexing, but if your rationale to own big tech is they have such high weight to the index, that is indeed a description of closet indexing.
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