170. Is it worth following stock indices, Verneri Pulkkinen?
This time, I invited Verneri for an interview on a topic important to most investors: “indices.” Verneri himself needs no introduction, as he was the first person interviewed for this thread.
I asked him questions that interest me personally and that I thought would be useful for various types of investors. At least for me, I gained plenty of new, useful things to think about regarding my own investing activities. 
1. What are stock indices? Why is the main focus always on US indices?
Stock indices are indices that describe the development of stock exchanges. An index is a ratio that describes the relative change in stock prices. The US S&P 500, Germany’s DAX, or the Helsinki Stock Exchange’s general index are well-known indices.
Indices are built using countless different criteria, but main indices generally describe the average development of the market. The largest companies have the highest weight in indices unless the index is weight-restricted. For example, NVIDIA’s weight in the S&P 500 index is about 7% at the time of writing.
In addition to price indices, there are return indices, where dividend yields are included in the index’s performance (so-called Total Return).
American indices are undeniably the center of attention because the market capitalization of US stock exchanges is about two-thirds of the value of the world’s stock markets, and the United States is an economic, cultural, and military hegemon.
2. If you can’t mention the indices of the Helsinki (Hesuli) exchange or US indices, what are the five most important indices to you? Justify your choices.
STOXX 600 Europe covers 90% of the market capitalization of European exchanges, and its 600 members describe the development of European markets reasonably well.
MSCI ACWI, or MSCI’s All Country World Index, depicts the development of the world’s stock markets, including all kinds of markets. However, 64% of the index’s composition comes from the United States, so in practice, it is a “closet USA” index with global flavor.
MSCI ex USA describes the performance of indices in the (developed) world excluding the United States.
MSCI Emerging Markets describes well how the exchanges of emerging growth economies are doing. However, half of this index consists of China and Taiwan.
The First North Finland small-cap index tells a grim story of the bursting of the Finnish small-cap bubble, but there may be gems found among the wreckage. Sentiment is apathetic.
3. Why is it good for an investor to follow an index, and what information can be gained from them?
Indices generally describe the development of different exchanges well on a general level. In addition, almost all indices can be invested in cost-effectively through ETFs. Indices therefore offer investors an easy alternative to investing instead of or alongside stock picking.
4. What pitfalls are associated with following indices? What kind of thought errors or false conclusions are easily drawn from them?
Many indices are quite concentrated. For example, the MSCI version of the Korean stock exchange, MSCI South Korea, includes Samsung with a 30% weight. 8 large technology corporations represent over 30% of the S&P 500 index. Nordea, in turn, dominates the non-weight-restricted Helsinki Stock Exchange general index, OMXHPI.
Because stock markets tend to be concentrated, stock indices do not necessarily describe the development of the average company well. For example, in the Helsinki Stock Exchange, we currently have a fierce bull market for engineering companies and Nordea, while forest companies and small-cap stocks are stagnating.
Stock indices are not the same thing as the economy. Investors may think that the stock market and the economy must move in the same direction. Stock markets describe the development of companies; the economy moves on its own tracks. Even strong economic growth does not necessarily mean good stock market performance, for which China is a good example.
5. Should an enthusiastic stock picker focusing on Helsinki (Hesuli) only check the OMXHPI index once a month and then forget all stock indices?
That’s a good question. How much time should a stock picker spend following markets and indices in general, in addition to researching companies? Time spent always has an opportunity cost. Once a month is enough if you don’t need this kind of noise, especially if the investor has price alerts set. I would still glance occasionally at how the rest of the world is doing. Helsinki doesn’t live in a vacuum; it moves with the world’s tides.
Thank you, Verneri, for the interesting and educational answers!
At least I tend to look at indices too one-dimensionally—I draw conclusions that are too direct, which has occasionally backfired as losses. I am also sometimes guilty of watching indices too slavishly, which has never resulted in anything good for me.
Perhaps based on/with the help of Verneri’s answers, I will be able to take it more wisely and—more relaxed. 
Have a nice weekend! 