Friday, June 13, 2008

Cabot Oil & Gas (COG) and Massey Energy (MEE) Added to S&P 500

One thing I've railed about is so many mutual funds are simply masquerading as index funds, with all the same tired old names, in various weightings; collecting a lot of assets and a lot of fees and happy to provide results near to whatever the market provides. Last night came news that 2 of our (50-55) long holdings will be added to the S&P 500.

So let it be known, we owned these before the S&P added them to their indexes, and we are not a closet index fund ;)

If you want to know an ironic fact, most people assume that when a stock gets added to the S&P 500 or any major index (say Russell 1000) that this is a boon to the stock price. The reason being that all these index funds who mimic the indexes (plus all those mutual funds who secretly nearly mimic the indexes but charge much higher fees to do so) have to buy these stocks. But a lot of academic studies show that in fact, the stocks that get kicked out of an index do far better than the ones going in. There are a lot of theories on this as to why but the one that makes sense to me is simply "reversion to mean". The index "deciders" are humans just like the rest of us; they tend to chase trends. For example, in the late 90s every index was getting stuffed with technology stocks - that worked out great - until about a year or two later. And the type of stuff they were kicking out tended to massively outperform in the years after. Just food for thought when you hear the conventional "wisdom" of how a stock must go up simply because the mutual funds must buy it, now that it has been added to an index...

With that said, I obviously believe these 2 will be exceptions for the foreseeable future ;)

Long Cabot Oil & Gas, Massey Energy in fund; no personal position

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