Berkshire Hathaway Mimics The Google Effect

Last Updated Jan 27, 2010 2:45 PM EST

Earlier this month, I wrote about The Case against S&P 500 Index Funds. I heard from John C. Bogle on that column, which I'll write about shortly.

One of the two flaws of the S&P 500 index funds that I pointed out was what I called the Google Effect:

On March 23, 2006, Standard & Poor's announced Google was being admitted to the S&P 500 index. It made the announcement after the stock market had closed that day. Now, just because the stock market is closed doesn't mean people can't trade stocks. Thanks to a Wall Street invention called after-hours trading, it's possible to buy and sell stocks after the market closes. And in after-hours trading, Google went up a whopping 7.3 percent that night. That's because investors knew that all of the many large S&P 500 index funds had to go out and buy Google pronto. Demand for the stock drove the price higher.
Last night, the following occurred as Standard and Poor's admitted Berkshire Hathaway to the S&P 500 index: Berkshire admitted to S&P 500 Index.
Berkshire shares jumped 8.2 percent to $73.61 in after-hours trading Tuesday.
If you own an S&P 500 index fund, you'll be buying a stock at a premium due to its admission to the index. If you own a total index fund, you owned it before this increase, and still do. And if you owned Berkshire Hathaway directly, the news is all good.

The Google Effect is alive and well. Tip of my hat to Jack Bogle for also giving investors a total index fund.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.