Wall Street Learns: This Year, Everything Beats the S&P 500
The corrected Bloomberg headline might seem unlikely for 2024, but it's statistically feasible. In fact, for this headline to turn into reality, 51% of active mandates must outperform the S&P 500. Surpassing the S&P 500 isn't just feasible; the real challenge lies in changing perceptions. Active management isn't fading away; it's poised for a resurgence starting in 2024. Let’s explore why the original Bloomberg headline was misguided and required correction.
Firstly, the S&P 100 ETF (OEF) significantly outperformed the S&P 500, contradicting the notion that nothing beats the S&P 500. A single example, such as this, is sufficient to challenge the idea that the S&P 500 is the ultimate benchmark for investment management.
Secondly, if we consider a scenario where 'A' beats 'B', and 'C' beats 'A', then 'C' emerges as the winner. Therefore, if something surpasses the S&P 100's 30% return, we have a clear victor. Only four companies from the S&P 100’s top 10 by weight made it to this year’s top performers list, indicating the possibility of outperforming the S&P 100.
Thirdly, among the S&P 100’s top 10 by weight, only 8 were part of the 22 stocks that exceeded the S&P 100’s 32% return. This means that a portfolio of 14 stocks, not in the S&P 100's top 10 by weight, outperformed the index, demonstrating that the S&P 100 was indeed beatable with diverse weighting methodologies.
Fourthly, indexes operate on open rules. The S&P 100 follows a transparent methodology. Our E&R S&P 100 Index, running since January 2023, outstripped the S&P 100 by a staggering 1000 basis points. This suggests that with an alternative methodology, it's possible to find oneself on the favourable side of statistics, a promising outlook for 2024 and beyond.
Fifthly, the rarity of consistently achieving new highs is noteworthy. Since the peak in January 2020, it has taken three years to reach new highs, a significant acceleration compared to the 12 years it took from 2000. The E&R U.S. 100 Index, starting in 2013, already reached a new high in November this year. This indicates that benchmarks built on dynamic systems, as opposed to static MCAP-weighted methodologies, can achieve new highs even under challenging conditions.
Enjoy the investing myths while they last. Don't believe all that you read. Be ready to dig in, read, understand, apply logic and have the courage to ask uncomfortable questions. Modern Science is here to assist Modern Finance.
Happy New Year.
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