Wayne Thorp’s July 2009 AAII Journal article [“2009 Mid-Year Stock Screen Review: Is a Market Rebound in Progress?”] contains a table showing performances of various stock categories. There is a phenomenon in this table that I see frequently. It puzzles me.
The last section of Table 1 shows the year-to-date (YTD) results for “All Exchange-Listed Stocks” and for a variety of subsets. The “All Stock” YTD return is 27.1%, yet no single subset comes close to that.
How can the total return for the stock market be more than the sum (or average) of its component parts? What am I missing?
Wayne A. Thorp Responds:
The “All Exchange-Listed Stocks” designation refers to an equal-weighted “index” of all stocks traded on the American, New York, and NASDAQ exchanges found in AAII’s Stock Investor Pro database. It is a “total market” index, but the key difference from other market indexes such as the Wilshire 5000 is that it is equal-weighted. Most of the popular indexes—S&P 500, Wilshire 5000, etc.—are market-cap weighted. This means that the index’s performance is driven primarily by the largest companies, which make up a very small percentage of the overall stock membership in the index. As of the end of April, the 10 largest companies by market cap accounted for almost 15% of the cap-weighted Wilshire 5000 index, which has over 5,000 companies. According to the index calculator at the Wilshire Web site (www.wilshire.com), the Wilshire 5000 cap-weighted index had an average annual return of –1.81% over the 10-year period ending July 31, 2009. By comparison, the equal-weighted Wilshire 5000 had an average annual return of 10.94% over the same period.
Another aspect of municipal bond income that should be mentioned in the Investor Professor article, “Munis vs. Taxables: How to Determine the Taxable Yield” [July 2009 AAII Journal], is that municipal bond income—though not included in federal income for income tax purposes—is included in income when determining the level of premiums to be paid by persons on Medicare. That is, higher income individuals pay higher Medicare premiums and municipal bond income is included when calculating income for this purpose.
The Schloss screen criteria on page 8 of the October 2099 AAII Journal stated that the price-to-book-value ratio must be below one, but Table 1 showing the passing companies did not include this figure. The table should have listed the price-to-book-value ratio along with the current price of each stock. This information is presented below.
|Company (Exchange: Ticker)||
|New Dragon Asia Corp. (A:NWD)||0.15||1||0.15|
|O.I. Corporation (M:OICO)||5.41||7.4||0.73|
Exchange Key: A = American Stock Exchange; M = NASDAQ
Source: AAII’s Stock Investor Pro/Thomson Reuters/I/B/E/S. Data as of 6/30/2009.