If I keep pushing my idea of "political indexing", and tell people to not bother to vote and just to rely on the political active factions to decide at the poll, will I become a hero for saving John Doe the trouble of trying to figure out the issues, and to see what's right or wrong? Why can't he just accept the "wisdom of the masses"?
... I am going out on a limb and postulating that many "index investors" think of themselves as above average because they are relying on backtest results that say they are likely to beat the stupid money that trades a lot. I'm not saying they are wrong, just that many index investors do not think of themselves as "just average".
Regarding the OP, there is the whole question of "what index"? There are so many indexes out there. Some people trade indexes. And ETF's are just baskets of stocks, why not flip them? That's what many do. Have you guys heard that biotech is hot? Buy a biotech ETF to protect yourself from individual stock risk.
You can probably tell I'm having fun with this.
Please don't take me too seriously (but I'm above average).
Me too! But I do want people to think about what I pointed out.
Now, it is true that many investors trail the indexers. How many people never owned stocks in their life, but scraped up some money to buy dot-com stocks? I still recall around 1998 a story of people gathering up family heirlooms and selling them for the gold content in order to get money to buy stocks.
Indexing gives one a safety margin of diversification. But as Lsbcal points out, there are many indices: growth vs. value, small vs large cap, US vs international, developed vs emerging markets. Most indexing investors still have to decide how to weigh each of the above components. Stock vs. bond vs. cash?
So, indexers like to claim better performance, but which index are they talking about? And over what period?
Now, I agree that the market overall is reasonably efficient and rational. If a stock is priced at a lower or higher P/E than another, there's a reason for it. If you bet against the market, saying that this stock should be priced higher or lower, you would better have a good rationale. And even so, your hypothesis often turns out wrong.
But it causes me to itch when people take this "efficient market" to the extreme, and think that the market is this super-smart entity that can never be wrong. How can one then explain repeated bubbles and crashes? Did you ever allow yourself to question if the market could be wrong during the dot-com era or the more recent real estate bubble? See no evil, hear no evil, talk no evil?
In the political arena, with the "wisdom of the crowd", why did the world have terrible rulers in the past who had the popular support? Currently, Putin has the majority support of his people, despite bringing his country to ruin. The masses are not always right, in stock or in politics.