Comments on No Debt MBA: Buy stocks that leave the S&P 500

JT - Great point. I hadn't hear about the div...

2011-06-10T09:19:57.906-07:00

JT - Great point. I hadn't hear about the dividend slashing strategy but it definitely makes sense since I've read plenty of investment advice centered around dividend income.

I'm sure this has been exploited, but that sai...

2011-06-10T08:55:56.226-07:00

I'm sure this has been exploited, but that said, things that are exploited do eventually become profitable again. Natural markets have this effect. Someone finds an edge, everyone else finds out about it and ruins it, then everyone else leaves, and the edge returns until efficiency is realized.

There is actually a strategy that calls for investing in companies that cut back on their dividend, which contradicts the popular view of investing in "aristocrats," those which increase their dividends over time. This strategy has been markedly successful, mostly because dividend-paying companies attract dividend investors in wholesale, when then make a quick exit of the firm once it slashes its dividend. Then the opportunity is opened for people who don't need cash flow to buy a security for far less than dividend investors were willing to pay for it.

I agree, too risky. Honestly I'm too chicken ...

2011-06-09T16:09:22.626-07:00

I agree, too risky. Honestly I'm too chicken to pursue strategies like this (even if I thought they could pay off). I'm really just an armchair speculator - all my money is in index funds.

I haven't read about any studies on this effec...

2011-06-09T12:00:32.903-07:00

I haven't read about any studies on this effect, but I'm sure you can run some tests where you backtrack historical data on the last 10 companies to get dropped from the S&P500.

However IMHO, the day to day fluctuations are just too unpredictable. I personally haven't noticed companies depreciating significantly in value after removal from the S&P.

If you're pretty confident that this phenomenon exists, you can always use options to short a company that's leaving the S&P? That way even a tiny inefficiency could yield some pretty nice profits. Too risky for my taste though.