Why dumb Mr. Index is so tough to beat? Let’s discuss it’s alpha

This is a random thought on my musings about why index funds outperform most fund managers and active investors. When I compare index funds with every successful long-term investor, there are three salient features. In fact, the seemingly “dumb” Mr. Index appears to be the smartest of all investors because it doesn’t think and simply follows winning strategies mechanically.

1. Ranking and Sizing:
   Mr. Index always ranks the stocks it holds and allocates based on these rankings. The highest allocation goes to the top-ranked stocks, but it never does equal allocation.

2. Let Winners Run:
   Mr. Index will never reduce its stake in a winning stock, regardless of market conditions or price fluctuations.

3. Quick to Weed Out:
   Mr. Index is emotionless when it comes to removing losers. It completely removes stocks from its portfolio when they fall out of the ranking.

So if you think the only edge an investor can have over an index fund is a better ranking mechanism, remember that it is impossible to be as mechanical as an index fund in other aspects. Ranking stocks is definitely a challenging task, but Mr. Index uses a simple formula based on market capitalization and still outperforms almost everyone.

Thoughts?