I'm not so sure that this is true. Let's look at a broad index like the S%P 500. Do you really believe that the aggregate market value of these publicly traded companies does not accurately reflect their performance?
One of the mistakes that is commonly made when people look at these indices is that they look at profitability as the only measure of "performance" in determining the value of a broad range of companies. Profitability is one key measure, but growth prospects are also important in determining value. And yet neither of these account for what has probably been the single biggest driver of growth in the S&P 500 index: consolidation in industry.
Here's a perfect case in point ...
In 1999, two of the largest companies in the energy sector -- Exxon and Mobil -- merged into a single company. Before the merger, they were two separate companies that were included in the S&P 500 index. When they merged, the S&P 500 didn't suddenly become the S&P 499 ... The index was changed to reflect the addition of another company at #500.
In other words, there has been a lot of growth in the S&P 500 from one year to the next simply because the companies in the index aren't always the same companies from one year to the next.
Nowhere is this more evident than in a much smaller index like the Dow Jones Industrial Index. The Dow Jones Industrial Average (DJIA) tracks the value of 30 large companies that reflect industrial activity related to the U.S. economy. By my count, 14 of these 30 companies have changed just since 2000. And one of them -- AT&T -- had the unusual distinction of being dropped from the index in 2004 and then added back in 2005 after it was acquired by SBC Communications, which then changed its formal name to AT&T.
You’re exactly correct about the indexes but I’d change your line by saying the “companies in the indexes are NEVER the same from year to year since the mid 70’s.” The DOW would be under 1000 but for the manipulation of the listings to always rotate in companies with good growth prospects. From the time they dumped Johns Manville about 1975 the index has been somewhat phony and in terms of measuring the economy is useless. It only measures itself and this past year is up mostly because of growth by about 1/3 of its components. Across the board there is a lot of flat or down-sloping performance and I expect that to continue.