Stumbled upon this blog post a few days ago and was wondering what’s this community’s view to this particular critique of index investing? Spoilers:
What’s more, the price becomes a lot more driven by cash flows than fundamentals. If the two guys are doing active research and decide the stock is terrible, but the other 8 have incoming cash that they must invest in this stock because its part of the index and there was an inflow of say retirement investments, guess what - there’s more buying than selling! So even though fundamental research says the stock should go down, the stock goes up driven by blind demand.
While everyone’s more interested in how much they can sell the stock to someone else for, at the end of the chain somewhere someone must be getting revenue from the business, not the ‘greater fool’ to whom they can sell their shares. As investors, we don’t think about dividends much because we think about capital gains and the stock price is driven today by tons of factors not related to fundamentals - the fact that a brainless passive strategy is something we even consider talks about how crazy we’ve gotten with valuations and trading.