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Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A) ❤
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Author: rayvt ✧🐝  😊 😞
Number: of 15062 
Subject: Re: beating the market
Date: 07/14/2023 1:53 PM
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Firm A owns 10 houses, and firm B owns 1000 houses. Let's assume all houses are largely indistinguishable and on average pay the same rent and are thus also equal in value. Ideally - thinking like a business owner - you want to be invested equally across all the houses. (For simplicity we consider assets but in the general principle applies equally by substituting houses with 'sales channel', 'dollar of earnings' or even 'customer' - as the business as a whole doubles in economic size we want to be investing double the amount.)

With market cap weighting you have 100 times more capital places in firm A but the same amount of capital across each house.


But market cap is not the same as the company assets. One is the opinion of the stockholders (actually, the opinion of the person who made the most recent trade of the stock), the other is the hard assets of the company.
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