[simonh]

I'm not sure you understand my point. All the companies this article is talking about are listed and have shareholders. It's not about publicly listed versus anything else, it's about the different results from listed companies with different governance models.

That aside, if I bought a share in every company that was in the S&P 500 in 2013 and tracked their returns to now, only half of those shares would still even be in the S&P 500. The return on those that dropped out of it aren't reflected in the S&P 500 results, but they still matter from the POV of long term shareholder returns. You can't just exclude failing companies from the statistics and pretend that the stats are still valid and everything is rosy in investorland. That's sweeping under the rug on a massive scale.

Anyway investors in index funds aren't owners of the underlying shares and don't have any relationship with those companies. The article is about that notional ownership relationship between shareholders and companies, so index funds just aren't relevant to this discussion even if their performance was relevant (it isn't) or meaningful with respect to individual share ownership (also not).

The article does reference actual long term like for like studies of company performance. I'd love to see the results from updated studies.

[gruez]

>I'm not sure you understand my point. All the companies this article is talking about are listed and have shareholders. It's not about publicly listed versus anything else, it's about the different results from listed companies with different governance models.

I don't get it. Aren't all publicly listed companies supposed to maximize shareholder value? Or are you saying that it only applies to s&p 500 companies?

>That aside, if I bought a share in every company that was in the S&P 500 in 2013 and tracked their returns to now, only half of those shares would still even be in the S&P 500. The return on those that dropped out of it aren't reflected in the S&P 500 results, but they still matter from the POV of long term shareholder returns.

I fail to see how this matters "from the POV of long term shareholder returns". Even passive investment funds engage in rebalancing, which specifically mitigates the issue you described (ie. holding onto losers and not investing in new entrants).

>Anyway investors in index funds aren't owners of the underlying shares and don't have any relationship with those companies. The article is about that notional ownership relationship between shareholders and companies, so index funds just aren't relevant to this discussion even if their performance was relevant (it isn't) or meaningful with respect to individual share ownership (also not).

I fail to see why it's not relevant because you own the shares through an index fund. The incentives are still aligned the same way: Shareholder value => etf value => investor value.

[Nevermark]

I think what is being pointed out is:

An index fund based on an index that updates its company list based on any biased metric (unbiased = all companies, or unbiased random sampling of companies) is not representative of all companies.

Not even all publicly traded companies.

[gruez]

>unbiased = all companies, or unbiased random sampling of companies)

Most indexes are market-cap weighted for a reason. Suppose we weigh each company equally. If you have 90 shitty companies and 10 good companies, but the 10 good companies combined are 10x as big as the 90 shitty companies combined, is it fair to conclude that "companies are shitty"? Suppose the 10 good companies spun themselves out into 100 separate companies, did the quality of companies improve by 5x (10% good to 53% good)?

[Nevermark]

I think you are mixing two different points.

1) Of course indexes are biased. Lots of good reasons for that as you point out.

2) But that makes indexes unrepresentative of average returns. Average returns include all caps, or a good estimate could be had from a random selection, weighted by their individual caps (as you correctly point out).

(That is what it means to have an unbiased estimate of total returns on total cap of all companies. An accurate estimate cannot have biases: not a bias toward smaller companies simply because there are more of them, nor biased toward large companies, as most indexes do.)

[gruez]

>2) But that makes indexes unrepresentative of average returns

But average returns should be market cap weighted to be meaningful. If you made investments of $10 and $1, which were later valued $12 and $2 respectively, what was your "average return"? The average of the two investments, (12/10 + 2/1)/2 = 1.60? or the weighted average (12+2)/(10+1) = 1.27?

[Nevermark]

You are right.

Actual average returns are simply total cap at one time divided by total cap at a previous time: TC(t2)/TC(t1)

That probably is easy enough to do.

But an estimate of that would be an average of returns for randomly chosen companies, but with either:

1) straight random selection of companies, with the individual returns weighted by their company size, or ...

2) ... random selection of companies, with probabilities of each company weighted by size, then the unweighted average of those returns.

So you are right, one way or another a subsample of companies needs to weight companies by size to account for the greater levels of investment in large companies.

[lotsofpulp]

> Anyway investors in index funds aren't owners of the underlying shares and don't have any relationship with those companies.

Why do people buy index funds?

[toast0]

I think the quoted statement is as true as investors in companies aren't owners of the underlying bank accounts and don't have any relationship with those banks.

It's true that an index fund investor doesn't get to vote in company elections, get company reports, etc. But the funds generally follow their policies and what not, so it provides a lower effort way to invest in a multitude of companies. The current regime of zero comissions and fractional share trading makes it more possible to self index, but it's a lot less work to buy shares in one of the many competing low-cost index funds.

[simonh]

What's that got to do with the reasons why people buy individual shares, and the obligations of companies to those people relative to other stakeholders such as bond holder, creditors, directors, managers and employees?

[lotsofpulp]

I do not know, but I did not intend to imply anything with my question.

My question was to find out what incentive people have to purchase index funds if they “aren't owners of the underlying shares and don't have any relationship with those companies.”

[simonh]

They want reliable returns.