An equal-weighted basket of FTSE 350 stocks has hugely out-performed the capitalization-weighted index - 36% against 21%. This is because the cap-weighted index has been dragged down by poor performance by mega-cap stocks, Glaxo and Vodafone, and because mid-cap stocks have out-performed larger ones. Our letter baskets benefit from this equal-weighting. But fund managers, being closet trackers, have lost by being roughly cap-weighted.
As Isaac Tabner says, over the long-run, cap-weighted indices beat equal-weighted ones.
There's a big difference between being rational and being right.
As my new chum Daniel Finkelstein says, you cannot judge the quality of a decision by its outcome.