Most investors simply don’t understand that stock market indexes most investors track are market capitalization weighted. This means that they disproportionately represent companies that have gone up in price instead of companies that have better fundamentals’. And since the indexes are rebalanced based on higher prices, in effect these indexes are momentum investment strategies. Momentum investment strategies always do the best during good markets and worst doing bad markets.
Essential to our way of looking at the world is to preserve against the permanent loss of capital, or to lose money we can’t make back. With that in mind, we strongly favor the approach Steve Romick takes with his strategy to that of pursuing returns in overvalued market indexes. While we can’t predict a market collapse, we can plan for a period of low returns where fundamentals will matter again.
Link to FPA Performance Report