Putting the Meme Stocks in the Index
Also Arm China, private equity recruiting, carbon trading and Robinhood restrictions.
Programming note: Money Stuff will be off for a few days, back next Wednesday, Sept. 8.
Every so often a weird stock goes up a lot, and it becomes so valuable that it qualifies for the S&P 500, the main index of U.S. large-cap stocks, and then people write articles that are like “oh no all the index funds are being forced to buy this weird stock at a huge valuation that makes no sense.” This does not bother me very much: The whole point of an index fund is that you buy all the stocks at whatever their market prices are, rather than trying to predict which ones are over- or undervalued. If you index, sometimes you will buy stocks that are overvalued, but, crucially, you will do this less often than most fundamental active investors do. The fundamental active investors, remember, underperform the index in aggregate. So when they go around saying “hahaha the index funds are so dumb for buying this crazy overvalued stock,” they are wrong slightly more often than they are right.