Murray Stahl of FRMO Corp. (OTCMKTS:FRMO) overview on S&P 500 (INDEXSP:.INX). Act of 1940. So, some of the normal SEC checks and balances don’t necessarily apply. The quid pro quo for that is that you operate the fund in a formulaic mode. You have to choose a formula and stick to that formula. If you don’t stick to that formula, you might lose your charter for the fund.

S&P 500 Murray Stahl

Murray Stahl : Owner-operators in the S&P 500 index

The trouble with the idea of having a rigid charter is that it begins to distort reality. An example: I believe—I can’t prove this, but I’ve said it before in many public forums, so I’ll say it again—I believe that, if you identified all the so-called owner-operators that were present in the S&P 500 Index during the last five-plus decades since the S&P 500 started in 1957, including Wal-Mart Stores, Inc. (NYSE:WMT) in its day and Microsoft in its day and Intel in its day, and you removed them from the index as if they were never there and calculated the return on the rest of the S&P 500 (INDEXSP:.INX), I don’t think anybody ever would be satisfied with the result.

What I’m saying is the bulk of the return was really attributable to the owner-operators. You can see that without doing a calculation, if you take, for example, Wal-Mart. Even if you don’t know exactly what the rate of return was, you know that Wal-Mart Stores, Inc. (NYSE:WMT) was one of the best companies in the S&P 500 (INDEXSP:.INX) in the time that Sam Walton ran the company. Now, to extend this exercise, if this were 1957 and Wal-Mart existed then and Wal-Mart were in the Index, using the method currently employed by the S&P 500, Wal-Mart would be in the index not at its market capitalization weight but at its float weight, which means that, for the entire history of Wal-Mart in the S&P, it would have been at a lower weight than was the case historically.

Murray Stahl on Wal-Mart

There’s nothing that you could have bought in the S&P 500 (INDEXSP:.INX) to replace Wal-Mart Stores, Inc. (NYSE:WMT) that would have been as good. So, the only thing you can think of is to develop a model that would have had a lower weighting in Wal-Mart, and the balance would have been spread among the other companies in the S&P. But Wal-Mart was better than the S&P. So, by definition, the S&P rate of return would have been lower, just for that reason alone, and by a not insignificant amount. As a matter of fact, I think you actually tried to calculate that once.

STEVEN BREGMAN: Yes. For the 10 years or so that Wal-Mart Stores, Inc. (NYSE:WMT) was in the S&P 500 (INDEXSP:.INX) while Sam Walton was in charge of it—when it qualified, by our definition, as an owner-operator—it came into the S&P 500 at about a 25-basis-point weighting. And, at the time that he died a decade later, it was a 2-percentage-point weighting, all by appreciation. So, you can see, even with that one company, you can readily see, with a little application of algebra in your head, that it provided a major contribution to the returns of the S&P 500. And nearly 40% of the shares were held by the Walton family. So, it would have had a significantly lower weighting while it was in the S&P, had today’s rules about float adjustment and float adjustment weightings applied then.

Even if you just take one more example, just two companies, about two years later, Microsoft Corporation (NASDAQ:MSFT) came into the S&P 500 (INDEXSP:.INX) at a weight of 85 basis points and about 40% inside ownership. A dozen years later when Bill Gates announced his retirement, it was also close to a 2-percentage-point weighting. So, those two companies alone, made a measurable impact on the S&P 500. And there’s a significant difference between the way they would be counted today and the way they were counted a handful of years ago when the float-adjusted weighting approach was implemented.

Murray Stahl on the current weighting method

To continue on that subject, you could have said Intel Corporation (NASDAQ:INTC), Apple Inc. (NASDAQ:AAPL), Teledyne Technologies Incorporated (NYSE:TDY), or others. You could have identified, over the course of five to six decades, 80 to 90 companies that, not for the entire time period, but for various points in time, would have had lower weights in the S&P 500. So, I’m pretty confident that, if they recalculated the S&P 500 (INDEXSP:.INX) going back to 1957 using the current weighting method, I don’t think anybody would be too enamored with equity investments in general, because it was the S&P 500 that represented the idea of equities. That’s basically the indexation problem that you’re challenged with.

To address your question on ETFs, that’s the problem with ETFs, because you have to adopt a process that’s rigid. There are only two possibilities: either the world will agree that your ETF idea is sound and you’ll get a lot of money, or you won’t. If you get a lot of money, that will start changing the valuations, thereby changing the basic parameters that make your idea sound. As a result, it won’t be sound anymore, and it might even become unsound, which means you have to change your parameters. But you can’t change your parameters, because it’s locked in stone.

You can see it’s very much the generalized case of the Tesla example, that somebody is fortunate enough to buy Tesla and makes a certain amount of money, and then it arguably gets to a valuation that becomes, by most standards, extreme. It’s my subjective judgment—I don’t cast any aspersions on Tesla—but a lot of people would say that its current valuation is extreme. But there’s no mechanism by which to exercise the judgment. So, the valuation just goes off on this tangent. We’ve never really had that happen historically in the world of investing before.

Murray Stahl on ETF space

Therefore, to embark seriously in the ETF space, however tempting it might be from the point of view of revenue and raising money, it would be the very antithesis, the negation, of what we’re trying to do, because our hands would be tied. We could claim, and justifiably so, that because our hands are tied and there’s very little we can do that its acceptable to establish an ETF product. But it really wouldn’t be completely honest and moral because, although we wouldn’t know when, we would know the ultimate outcome, and that’s not right. We don’t want to do that.

So, we have to give ourselves the flexibility. For that reason, we really haven’t ventured into the ETF arena. One day we might. There might be different circumstances I just can’t predict. One day we might, and one day the rules might change, or one day we might have some unique idea that we just don’t have right now. But one day we might.

Murray Stahl On S&P 500 Weighting