The Total Stock Market Index
Assume, for the sake of this present discussion, that the term "stock
market" means the "stocks in the US markets"; this will simplify matters.
Other than that, you can replace the term "market" by any coherent,
consistent definition and everything said here will continue to remain
true, mutatis mutandis.
The (capitalization-weighted) Total Stock Market Index (or a fund designed
to track such an Index) is:
- NOT over-weighted or under-weighted in any asset class
or valuation style that is part of the Index. Saying otherwise is akin to
claiming that Stocks are incorrectly weighted in ticker symbols beginning
with the letter Z.
Over-weighting and under-weighting are defined relative to the
Index; therefore, the Index itself is neutral with respect to all weighting
judgments.
Corollary: Anyone who says otherwise is a fool or an
unscrupulous liar.
- NOT over-weighted or under-weighted in any asset class
or valuation style that is NOT part of the Index since
such a remark makes no sense at all. Saying otherwise is akin to claiming
that Stocks are incorrectly weighted in T-bills.
Corollary: Anyone who says otherwise is a fool or an
unscrupulous liar.
- NOT over-diversified or under-diversified with respect
to any asset class or valuation style that is part of the Index. Saying
otherwise is akin to claiming that Stocks are incorrectly diversified in
ticker symbols beginning with the letter Z.
Diversification is defined relative to the Index; therefore, the
Index itself is neutral with respect to all diversification judgments.
Corollary: Anyone who says otherwise is a fool or an
unscrupulous liar.
- NOT over-diversified or under-diversified with respect
to any asset class or valuation style that is NOT part of
the Index since such a remark makes no sense at all. Saying otherwise is
akin to claiming that Stocks are incorrectly diversified in T-bills.
Corollary: Anyone who says otherwise is a fool or an
unscrupulous liar.
- NOT contrarian or momentarian with respect to any of
its assets. Contrarian and momentarian tendencies are defined
relative to deviations (and the directions of these deviations) from the
Index; therefore the Index itself is neutral with respect to all contrarian
and momentarian judgments.
Corollary: Anyone who says otherwise is a fool or an
unscrupulous liar.
The Total Stock Market Index represents the aggregate, averaged behavior
of the entire market and all its participants. Therefore, any reasonable
boolean predicate P when applied to the market should be
projectible onto all of its participants. In other words, a
statement of the form "The Index is FOO" makes no sense unless it is
also true that "Everyone in the Market together is FOO".
Conversely, if a statement "Everyone in the Market together is
FOO" does not, cannot, even in principle, make sense, then the statement
"The Index is FOO" also does not, cannot, even in principle, make
sense.
Corollary: Anyone who says otherwise is a fool or an
unscrupulous liar.
The above statements are true regardless of your opinions on market
efficiency and investor rationality.
If, however, you believe in market efficiency and investor rationality, at
least in the operational sense (i.e. the market behaves as if all
information is incorporated instantaneously into prices, and investors behave
as if they are rational and possess full knowledge of all available
market information, both to a high-degree of accuracy), then:
The Total Stock Market Index is:
- NOT over-valued or under-valued. Terms like
over-valued and under-valued are meaningless in an
efficient market. All assets are correctly-valued in efficient markets
populated by rational investors.
Corollary: Anyone who says otherwise and also sells funds
from a company founded on the principles of market efficiency and investor
rationality is a fool or an unscrupulous, lying hypocrite.
- NOT subject to bubble risk. Terms like bubble
are meaningless in an efficient market. All assets are correctly-priced in
efficient markets populated by rational investors.
Corollary: Anyone who says otherwise and also sells funds
from a company founded on the principles of market efficiency and investor
rationality is a fool or an unscrupulous, lying hypocrite.
[ More on Markets ]
First written: Thu Nov 9 14:57:10 PST 2000
Last updated: Sun Jun 27 17:00:19 PDT 2004
URL: http://www.geocities.com/krishna_kunchith/markets/tsm.html