Subject: Re: Future growth
I'm sure Jim means funds where the index is weighted by market cap, meaning ALMOST all index funds. There are also index funds that are equal weight.... For these, you would not need to subtract the 1%/year...

Actually over a quarter of my rule-of-thumb 1% "cap weight index" drag for the S&P 500 is due to the reconstitution problem: changes are (a) ill advised, and (b) pre-announced and therefore front-run.
(a) is a problem because recent winners tend to get added while recent losers tend to get demoted, and there is on average mean reversion.
(b) is a problem because the index underperforms the actual stocks. It lets funds track the index accurately, at the expense of the holders of the funds in a hidden way.
Both problems are substantially mitigated simply by using an index list that's at least 6 months old, preferably 12 or more. (minus anything actually delisted since then, of course, most often from M&A).
The Russell has similar, perhaps bigger, problems: their methodology is entirely prescriptive, and always takes place on a single date per year at end June, so it's extremely easy to front run it.

An article about the S&P 500 effect notes:
"On average, from October 1989 through December 2017, additions underperformed the market by 128 bps in the 12 months after the effective date, and discretionary deletions outperformed by 2,044 bps. An investor could have adopted the very simple strategy of implementing the additions and deletions to the S&P 500 with a delay of 12 months and in doing so would have outpaced the S&P 500 by 25 bps a year!"
https://www.researchaffiliates...

A follow up looking at the specific case of the Tesla addition
https://www.researchaffiliates...


Use them to pick (say) 30-100 stocks in any handy index.
...
This is actually the way most of us invest, with the added theatre of actually guessing future prospects, pretending to do some calculations, using some other heuristic like quality of management, etc. Then we get the average 6.5% a year and think we're stockmarket tycoons.

Though I do appreciate the insight and its irony, this may not be the case. It is very likely that people trying to pick above-average firms will end up picking below-average firms more often than not, as it is extremely hard to avoid biases--recent good results tend to colour one's views too much. So merely "average" might do better. This has been the reason that quant investors are advised NOT to use quant list to generate individual stock ideas: the few you pick by hand from the screen results are pretty likely to be *worse* than the average of that screen's picks. In either situation, dice might work a lot better than discernment.

After all, for anyone to out perform the market over time (which some investors plainly do), someone else has to underperform. Those are probably people doing their very best to pick individual winners.

It is quite likely that Mr Buffett's advice on amateurs sticking to index investing has been excellent advice for the recipients, but not great for Berkshire's portfolio results--we need a large population of losers : )

Jim