Better Beta By Bananas

December 15, 2010

Better Beta By Bananas

Not too long ago, our editor-in-chief Jim Wiandt called the entire analytics R&D team into his office and offered a proposition.

“I grow weary of today’s weighting schemes,” he said. “Let us devise a better one.”

Market-cap indexes, he dismissed, are too hierarchal, while equal weighting is too communist. Fundamental indexes, he said, “encourage polygamy.”

“Make me an index that’s flash-crash proof,” he said. “One that fairly and accurately represents all companies in a sector, regardless of size. And smells like fresh-baked muffins.”

For hours, my fellow analysts and I sequestered ourselves away in our top secret Index Laboratory. We scribbled down differential equations and Fourier transforms until our fingers bled. We converted a pickle barrel into a coffee pot. We programmed 10,000 lines of BASIC using only our left pinky toes. And then we got to work.

Suzanne King, our fundamentals expert, advocated a Darwinian approach. Each year, she argued, one male and one female from the executive board of each company should be sent into an elaborate maze, where they’d fight other companies’ teams to the death—the results of which would be filmed before a live studio audience.

“Isn’t that the plot of ‘The Hunger Games’?” I asked.

“Investing is just like children’s literature,” she said. “Only the strongest survive.”

Our head technician, Percival Polynomian, argued that trend-following would better serve investors. He derived an algorithm that weighs companies based on their daily volume, stochastic oscillators and current ranking on the Billboard charts. It worked pretty well, too—at least until we discovered the algorithm ranked Justin Bieber higher than Apple.

Frustrated, I turned at last to Bobo, our senior vice president of Analytics. Bobo, for our newer readers, is an overweight chimp in a lab coat, who we pay in ripe fruit. He also has a corner office.

Vice President Bobo offered up a detailed plan that would weight stocks by their intrinsic Banana Quotient, a quantitative factor that predicts the presence or absence of vegetative quality. I probed for details, but Bobo soon became too engrossed in grooming Suzanne for nits.

In any case, we presented our various proposals to Jim the next day. He listened to the presentation with his trademark placid smile and congratulated us on our fine work. But as the research team filed out of the room, he pulled me aside.

“Crigger, I’m concerned,” he said. “None of these proposals is quite right.”

“It’s a thorny problem, sir,” I replied. “People have been searching for the perfect index for decades. You gave us four hours and a hungry monkey.”

“It’s good enough for the SEC,” Jim said sternly. “Do better.”

Thus, the team and I went back to the laboratory. After an all-nighter and two cases of Red Bull, we finally hit upon the perfect index: a Platonic ideal of technicals and fundamentals, immune to even the tiniest market flicker; whereby, if it were to be put into practice, the absolute minimum number of employees would be sent to jail. It also smelled faintly of snickerdoodles.

I pitched our plan to Jim the next day.

“Not bad, Crigger,” he said.

I flushed with pride and an absence of nits.

“But,” he said, after a thoughtful pause, “I still think it needs something. Something new, something exciting.”

He clapped his hands. “I know,” Jim said. “It needs more cowbell.”

And thus I unveil Index Publications’ newest enterprise: The Justin Bieber Bobotronic Mockingjay And Now With More Cowbell Total Return Index. Keep checking back for our methodology, which we’ll publish as soon as Legal approves the use of Comic Sans.

It’ll be scratch ‘n’ sniff.


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