In The Poor Standard of Standard & Poor’s , Daniel Gross writes that ‘ the S&P 500’s bad bubble-stock picks have cost investors billions’. Basically, telecommunications and dotcom stocks were added to the index precisely when they were most overvalued.
The really interesting story in all of this is that the idea of passively investing an index representing ‘the stock market as a whole’ is an illusion. Ultimately, there is no way to avoid the need for judgement about the worth of individual companies. This fact subtly undermines a great volume of economic thinking about market efficiency.