investors in the future. The reason is simple. If a firm’s mere entry into
the S&P 500 causes the price of its stock to rise, index investors will ulti-
mately hold overpriced stocks that will depress future returns.
An extreme example of overpricing occurred when Yahoo!, the
well-known firm, was added to the S&P 500 Index in December 1999.
Yahoo!’s price during this period is graphically depicted in Figure 20-3.
Standard & Poor’s announced after the close of trading on November 30
that Yahoo! would be added to the index on December 8. The next morn-
ing, Yahoo! opened up almost $9 per share at $115 and continued up-
ward to close at $174 a share on December 7, when index funds had to
buy the shares in order to match the index. In just 5 trading days be-
tween the announcement of Yahoo!’s inclusion in the index until it for-
mally became a member, the stock surged 64 percent. Volume during
those 5 days averaged 37 million shares, more than three times the aver-
age on the previous 30 days. On December 7, when index funds had to
352 PART 5 Building Wealth through Stocks
FIGURE 20–3
Price of Yahoo! around Its Admission to the S&P 500607080901001101201301401501601701801901/1 1/2 1/3 1/4 1/5 1/6 1/7 1/8 1/9 1/10 1/11 1/12 1/13 1/14 1/15 1/16 1/17 1/18 1/19 1/20 1/21 1/22 1/231999Price0100200300400500600
CloseOpenOpens at 115, Up 8.1%
from 11/30 CloseEntry into S&P at
12/7 Close of 174,
Up 63.6% from
11/30 CloseOpens 12/8 at
162, Down 6.9%
from 12/7 CloseEntry Announcement after
11/30 Close of 106.37511/1511/1611/1711/1811/1911/2211/2311/2411/2611/2911/3012/0112/0212/0312/0612/0712/0812/0912/1012/1312/1412/1512/16Volume (Millions)150M
100M50M