BRK to replace BNI in S&P 500

[onyx1]

http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldocumentfile&blobtable=SPComSecureDocument&blobheadervalue2=inline%3B+filename%3Ddownload.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1245205418835&blobheadervalue3=abinary%3B+charset%3DUTF-8&blobnocache=true

[Parsad]

Only one step for Buffett to go...The Dow!  Cheers!

[tyska]

Providing a nice after market jump to the stock also.

 

Dan

[beerbaron]

Sometimes Mr. Market is really irrational. It's not like nobody saw it coming, but yet BRK stayed flat for 6 months. Efficient market theory would say "if there is a 100$ bill on the floor it isnt there because someone already picked it up". A lot of people had a lot of time to pickup this 100$ bill!

 

BeerBaron

[Guest dealraker]

I'll have to admit that at my age I've seen a lot but watching Berkshire stock run up and down 7% a day is probably the strangest thing I've seen.  We live in a whacko state of mind.

[Viking]

A question to make value investors shudder, is anyone aware of any studies that talks about the short term effect to a stock's price of being added to the S&P? I notice an 8.5% pop in BRK-B after hours (although after hours quotes are notoriously volatile)...

[RickMayhew]

From:

 

http://www.msnbc.msn.com/id/35087100/ns/business-stocks_and_economy/

 

Buffett said he expects Berkshire will benefit from joining the S&P indexes, saying it will suddenly have buyers for about 6 percent of its shares because many investment funds buy stock in the companies in the S&P indexes to mirror the moves of the indexes. And those mutual fund buyers would plan to hold the stock long-term, which is what Buffett wants.

[vinod1]

A question to make value investors shudder, is anyone aware of any studies that talks about the short term effect to a stock's price of being added to the S&P? I notice an 8.5% pop in BRK-B after hours (although after hours quotes are notoriously volatile)...

 

There are quite a few studies on this. I remember reading a study (back in my days back as an efficient marketeer) that showed that stocks that are dropped from the S&P 500 index subsequently tend to outperform the index over some long term horizon.

 

Here is one paper that deals somewhat with this issue and you might be able to get a more relevant paper by digging through the references of this document and by searching for "S&P 500 Index inclusion" or "S&P 500 Index effect".

 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=991858

 

Thanks

 

Vinod

[Guest kawikaho]

Thanks for posting that.  I remember that too, and was about to post on it.  I also remember, although I'm not sure if this is accurate, that companies that are included in the S&P index tend to under perform.  Maybe that was just the DOW index. 

 

A question to make value investors shudder, is anyone aware of any studies that talks about the short term effect to a stock's price of being added to the S&P? I notice an 8.5% pop in BRK-B after hours (although after hours quotes are notoriously volatile)...

 

There are quite a few studies on this. I remember reading a study (back in my days back as an efficient marketeer) that showed that stocks that are dropped from the S&P 500 index subsequently tend to outperform the index over some long term horizon.

 

Here is one paper that deals somewhat with this issue and you might be able to get a more relevant paper by digging through the references of this document and by searching for "S&P 500 Index inclusion" or "S&P 500 Index effect".

 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=991858

 

Thanks

 

Vinod

[Dynamic]

I'd imagine, on average, a significant proportion of companies added to the S&P 500 Index are added because of significant up-rating of their market price, often because they are "flavor of the month" - e.g. by sector, such as Telecoms, Media & Technology in 1999. Another significant portion may enter the index after a large merger increases their Market Cap. Their weightings in the Index would often be minor, given that most new entries are in the 401-500th largest market caps.

 

I'd suspect that many such upratings will be reversed in a matter of a few years (e.g. the TMT crash), and a few of the mergers will not deliver the promised synergies and cause subsequent downrating.

 

Likewise, a number of companies that had been in 499th place, say, would have been marked down by Mr. Market for temporary impairments to operations, and would subsequently overcome their troubles and return to previous profitability and multiples.

 

This is typical reversion to the mean statistics.

 

BRKb is an unusually large-cap new-entry, having been excluded in the past by a high stock price and being thinly-traded, rather than a market cap at the margins of the index. Equally, the weighting will be more substantial than most new inclusions and the proportion of willing sellers may well be less, so it may experience a significantly different "inclusion effect" to the average of all newly-indexed companies. Of course, a proportion of the BNI stock held by index funds will convert to BRK stock, so it won't require as much extra BRK to be purchased as it would if BRK had entered the S&P without purchasing BNI and replacing BNI in the index simultaneously.