How Nifty Index Passive buyers beat ITC as well as trading against themselves ? – MoneyDhan

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In year 2015, Reliance was 500 RS per share. And ITC was 200 RS per share.

Let’s imagine you invested 10 lakhs in ITC and 10 Lakhs in reliance.

Today ITC 10 Lakh is, still 10 Lakh. But Reliance 10 Lakh is, 30 lakhs.

One condition for you is, You cannot bring in new money.

You have 2 choices

  1. Sell some ITC, and buy more reliance at all time high.

  2. Sell some Reliance at all time high and buy ITC.

If you follow choice 1,
that is how nifty Index weightage allocation operates.

If you follow choice 2,
that is what majority of “logically, smart, conservative, judicious” investors do.

And that is how my friend, why lots of such people are talented in accumulating and holding onto loss making stocks.

In 2015, They will tell you how they exited Hdfcbank once and now have complete faith in Yesbank, Rcom, suzlon, DHFL etc. Do note we are talking about year 2015, the individual Entered those stocks 5 years back, before they became dud/rotten. Even Anil Ambani had no clue that he will go bankrupt 5 years back in 2015.

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If you think you are not one of them, here is the test.
Cut all stocks that are at loss in your portfolio and give that money to top 3 performing stocks. You will hesitate. Its completely illogical, isn’t it?

If i am index, I will exit my hdfcbank the day icicibank or Kotak bank over takes it in market Capitalization.

I will exit TCS and buy Infosys the day, Infosys market Capitalization is higher than tcs

Nifty wahi toh karta Hain. And thus Index buyers are actually trading against themselves and making money.

Indices are self-sustaining mechanism of ruling out losers and embracing winners (which is opposite of what retail investors generally tend to do).
Hence only 7.5% of active fund managers have been able to beat index over the past 15 years.
Index kicks out an ill-performing stock sitting at the tail of index and bring in a superior performing stock jumping at the forefront of the next-best lot.

So while buying index, you are getting an expensive Reliance which could rally further up while you shed some ITC which will bleed less now.

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Another example is tesla.
It will have 1% of index sp500 weightage. And SP500 has a market capitalization of around $30 trillion. India is hardly 2.5 Trillion dollar market cap (all companies added up).

Look at the pic, at what price tesla got included into an index. Even though it is an ridiculous process – The irony is that, index buyers beat more than 90 % of active fund managers (post fee).

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Money Dhan

Money Dhan

Sujith comes with 15 years of experience in the derivatives market along with Long term Wealth creation via Large-cap companies. His theory is: If risk-free Bank FD generates 100% in X years, the Stock market should provide that return in half the time.
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