If literally EVERYONE indexed – we’d be the blind leading the blind, as you have noted. In that situation, some smart guy would notice that and say, “Hey wow, the market prices are really disconnected from what I think the fair value is,” and *boom* we have active investors again. I can’t imagine a situation where we won’t have some active investors keeping the markets more or less efficient, because there is always someone looking to profit from inefficiencies. That’s not to say that the corresponding market moves may not be violent if nobody sees it coming, but…

The reason that I’m generally fond of indexes right now is because of the inequality of information between Fund Company A and the Investor. Its the same relationship as the one between the used car salesman and the consumer, except that in that case, the consumer expects a hefty discount on the car to compensate for the lack of a guarantee that it actually is a good car. In the fund case, not only does the fund company skip the discount for the extra risk, the typically charge you more for it. I also feel ill-equipped to separate the fund wheat from the fund chaff, in order to pick a winner.

Seems like the logical answer there is to pick your own stocks – but that’s definitely not something everyone can do and expect better-than-index results. I’m looking into becoming a more active investor, and in the mean time think indexing is a good idea. Even when I’m taking a more active roll in my investments, there will be segments that I won’t have the experience/economies of scale to manage myself (international, EM, etc), and I think indexes are a good fit there.

I can agree with you that the “cult of the index” (i.e. assuming guaranteed, work-free 10%+ returns for life) is a bad thing, but I don’t think indexes are inherently evil. Do you have any thoughts on that?

@FHR – Unfortunately, I’m too lazy to write one. A big problem with doing something like that is that my pick will inevitably reflect my personal investment philosophy as well as my level of skills — not necessarily whether the books are any good for anyone else.

Saw the mention of the Mauboussin book and was wondering if you would maybe do a blog posting some of your favorite investing books. Of course, you may have done this in the past but I’m too lazy to look at old-er posts.

Thanks.

“All intelligent investing is value investing – to acquire more than you are paying for. Investing is where you find a few great companies and then sit on your ass.”
- Charlie Munger