Index Earnings Weightings
Some of you probably read this article by Jeremy Siegel already. But it's a very interesting look at weighting of earnings in the S&P.
Hadn’t seen that, but just read it. Thanks. That is good stuff. He is too smart for me to understand sometimes and I am not being sarcastic.
I think he makes a good argument but I would have to side with S&P. It’s true AIG losses don’t effect XOM shareholders… UNLESS the way they own both is by their S&P holding. I would say the S&P method of calculating earning is analogous to ‘Real Return’Just my $0.02
I have to side with Siegel on this. Let me explain:
Let’s say I own two business; one of them (a) is a restaurant in which I own a 10% share. The other one (b) is a restaurant in which I own a 70% share. Business (a) loses $1mm. My share of the loss is $100K. Business (b) earns $500K. My share of the gain is $350K. My total earnings for my share of the businesses is $250K.
Under the current S&P earnings structure, my earnings (as reported) would be a loss of $500K ($500K gain - $1mm loss). However, since each of my holdings are not owned 100%, I do not share in 100% of the profit and loss. Now, if the S&P itself was evenly weighted (right now the S&P 500 is weighted based on market cap), then then their argument that the earnings of each S&P member should be evenly weighted would be valid, but they’re not. They are basically saying that although the 500th largest company accounts for maybe 1/10,000th of the S&P 500 Index, their earnings are weighted 1/500th. The numerator and denominator in the P/E are based on different cap weightings, which is not consistent.
Point is, “I” don’t own an even weighting of each of the S&P companies, I own them based on market cap weightings. So I shouldn’t be penalized for the losses of small companies (which I own less of) as much as for those of the big companies (which I own more of).