A Fictional Infinity of Indexes

A good stock index would be: the index that tracks what stocks Warren Buffett’s Berkshire Hathaway Inc. owns, weighted by how much money Berkshire has allocated to each stock. Buffett’s stock picks have done pretty well over a long time, so this index has a pretty good track record, and people like to invest like Warren Buffett, so this index will be popular and index funds based on it will attract a lot of money.

There is an important problem with this index, though, which is that it is strictly backwards-looking. You can generally tell what stocks Berkshire bought and sold in the past, and how much of them, because it files a list with the Securities and Exchange Commission on a lagged, historical basis. But you don’t generally know what stocks Buffett is buying today, or how much of them. This is a bit of a problem for the index as an index, in that you can never quite construct a current version; your most recent index will be a few months old. For some academic purposes—looking at the portfolio’s composition and performance over a long time—that’s not a big problem. But it’s a huge problem for the index as an index fund: If the index fund can’t buy today the stocks that Buffett is buying today, it will not track his performance, and it’s mostly useless as an investment vehicle.