Effective May 6, 2002, any
company selling at a stock price of less
than a dollar no longer has equal representation in the GTI.
The GTI had always assumed equal dollar investments in each of
its component companies, with weekly rebalancing to maintain that
equality. (Prior to December 1, 2000, rebalancing was performed
daily.) The GTI thus assumes that an investor spreads his money
evenly over all of the listed companies.
Of course, no one actually does that. We all have our preferences,
and we're not about to rebalance nearly that often. But experience
has shown that the equal-dollar approach produces an index that
closely tracks real-world portfolios, as long as they are reasonably
broad in their holdings.
(See Is the GTI an Accurate Measure? for an illustration of how one
portfolio -- mine -- tracked the GTI over the period of a year and a half.)
But the equal-dollar assumption is implausible in the case of extremely
low-priced stocks. Are we likely to devote an equal share of our capital
to a company selling for 25 cents a share? I don't think so. It's just too
speculative for the long-term investors to whom this site is dedicated.
If a company is selling for less than a dollar, the market is probably
worried about bankruptcy, and so are we.
So, for "penny stocks," I now reduce their weight in the index to the
same extent that their price is less than a dollar. If a company is selling
for 50 cents, it will have half of a share; 10 cents, a tenth of a share; and so
on. If and when the price goes over a dollar, it will have a full share.
What it comes down to is that in the weekly rebalancing, we neither
increase nor decrease our holdings in stocks selling for under a dollar.
We simply hold on to however many shares we have, until either the stock
price recovers, or the company is removed from the list.
What about a company that resorts to a reverse split to pump up its stock
price? I could argue either side of the question, but on balance I have
decided to look at the actual price (is it under or over a dollar?) and ignore
the iffy issues of why the reverse split took place, or what might have been.