Practical Applications of Rip Van Winkle Indexing

Abstract

A new piece of research debunks the efficacy of the link between current price and market-cap weighting in stock selection, using a hypothetical “Rip Van Winkle” index portfolio based on stale, 20-year-old prices. When old Rip wakes up, he finds that his strategy outperforms a portfolio using current prices of the largest market-cap-weighted stocks.

Co-authors Robert Arnott , Noah Beck and Vitali Kalesnik of Research Affiliates created this controlled experiment to provide a fresh perspective on the impact of prices on cap-weighted approaches, and find that such approaches come up short.

“It’s another nail in the coffin of efficient market theory. You can ignore 20 years of information—and still outperform!” says Arnott.