Philosophico-investment question for Mungofitch:

Of course, the cap weight index has really been on a tear just lately, so today is a particularly lucky endpoint for the S&P side of the test. The same scheme showed the equal weight annual approach with an advantage of 1.17%/year as recently as two years ago (i.e., 1986-2022 inclusive).

As I contemplate the difference between equal weight and cap weight, it seems to be equivalent to this:

1) Cap-weight means you own the same fraction of every company you own. If your universe of stocks has market cap $6trillion and your investment pool is $6million, you would simply buy 1/billionth of each stock you put in your port. If the company had 14 billion shares outstanding, you would buy 14 shares. Maintaining the port is easy since as stock prices go up and down, your fixed 14 shares stays correct. You would only have to "rebalance" if the company were materially changing its number of shares outstanding buy either a) share buybacks reducing its count or b) public offerings or dilution through exercise of options grants increasing its count.

2) Equal-weight means you own the same dollar value of every company you own. If you had a $6million portfolio and you had 5000 names in your universe, you would own $120 of each company in your port. An important part of an equal-weight port would be deciding your strategy for rebalancing. What are my results expected to be if I rebalance daily? weekly? monthly? quarterly? or annually? Ignoring trading costs my intuition is you would get around the same result for daily weekly and montly rebalancing, and might start seeing a difference for quarterly or annual rebalancing. As the length of time between rebalances increases, your results should look more and more like those for a cap-weighted portfolio.

So the philosophico-investment question is: is LTBH not a good idea? If we had owned BRK and SP500 in equal parts in a port since 1950, would not cap weighted strategy have outperformed equal-weighted strategy? I guess this is a question I should do the tests to back test, but I'm guessing you know the answer already.

The other intuitive gap from equal-weight I have is, are you sure you are better off selling the shares you own in companies that are seemingly rising more each year than most of your other stocks?

Philosophically, equal-weight and cap-weight each have arguments for seeming to be good choices. For equal-weight, the argument seems to be that most stock price motion is excursions from the mean so rebalancing regularly is equivalent to buy-low and sell-high. For equal-cap the argument might be, Large caps all started as small caps and proved that they could grow faster than their peers by becoming large caps, so you should hold your winners and let them keep doing their thing.

Thanks for your attention.
R:)