By Vijay
Introduction
Every investor knows the headline: “The Market Index is Up!” This celebrated number—the S&P 500, the FTSE, or any national benchmark—is presented as the ultimate scorecard of success.
But this article reveals a fundamental, systemic flaw: The modern stock index is a self-optimizing engine that systematically removes failed companies, hiding the true cost of equity investing from the public.
Your diversified portfolio must absorb these losses, creating a measurable and often shocking gap between the market’s reported success and your personal return.
The Core Problem: The Structural Discrepensy of Survivorship Bias
To demonstrate the flaw, let’s run a practical model that reflects the necessary cycle of creative destruction in a functioning market.
The Scenario:
Imagine you started with a total investment of $100, spread equally across 100 publicly traded companies.
| Group | Initial Investment | Final Status | Final Price/Share |
| Winners (90 Companies) | $90.00 | Survived | $1.10 (10% Gain) |
| Losers (10 Companies) | $10.00 | Failed/Delisted | $0.00 (100% Loss) |
📊 The Financial Discrepancy
We compare the return of the Market Index (which only tracks survivors) versus the Investor’s Realized Return (which tracks everything).
| Metric | Index Growth (Theoretical) | Investor’s Realized Return (Aggregate) |
| Final Value of Survivors (90 cos) | $99.00 | $99.00 |
| Final Value of Failures (10 cos) | EXCLUDED from calculation | $0.00 |
| Reported Index Growth | $(\$99 – \$90) / \$90 = \mathbf{+10.0\%}$ | $(\$99 – \$100) / \$100 = \mathbf{-1.0\%}$ |
The Verdict:
The Market Index reports a 10.0% gain, while the diversified investor’s portfolio suffered a 1.0% loss. The 11% difference is the quantifiable hidden cost of corporate failure—the true risk premium paid by the market participant.
Why The System Is Not Legally Cheating (But Is Misleading)
The index operates this way due to its mandate, not malice.
- The Index Must Be Investable: The primary purpose of a modern index is to serve as a benchmark for passive funds (ETFs, etc.). These funds must only hold liquid, viable securities. They cannot hold stock in bankrupt companies. The index must purge losers to remain relevant to current investment dollars.
- The Investor Pays the Price of Risk: When a company fails (often triggered by an insolvency process like CIRP), the investor absorbs the 100% loss. That loss is a permanent drag on personal capital, yet it is utterly ignored by the index’s calculation because the failing stock is simply removed from the basket.
This failure to account for corporate mortality is the structural bias that overstates the long-term compounding power of the market.
🔑 Your Theorem: The Need for an Aggregate Market Value (AMV) Index
For financial reporting to be truly honest, investors need a comprehensive metric that reflects the market’s total output—winners and losers combined.
My proposal is the creation of an Aggregate Market Value (AMV) Index, published alongside the standard index:
| Index Type | What It Measures | Investor Benefit |
| Standard Index | Performance of the Winners (Survivors). | Shows the potential reward of the market. |
| AMV Index (Proposed) | The aggregate return of ALL initial investments. | Shows the True Cost of Risk and the realized return of the economic system. |
Conclusion
If the AMV Index consistently shows a lower return than the Standard Index, it serves as a powerful, permanent reminder that the market’s growth is inherently built on a significant number of corporate failures.
The headline index number represents potential; the AMV index would represent reality. Demand the full picture before you commit your hard-earned capital.
Disclaimer: This article provides a theoretical framework for understanding market dynamics and is not investment advice.