A Professor Who Was Right About Index Funds All Along
I'm a big believer in index funds and have been putting my money into them for a long time. But... you have to wonder where this is all ending up as more and more people move to passive index funds. The power of the market is based on millions of individual opinions on the price of a company's stock. On average, over time, these collective opinions will be correct. But say in the extreme case, it got to the point where all funds were invested passively, we'd lose this pricing mechanism. Individual stock prices would not reflect the true value of a company. Instead, the price of each company's stock, healthy and sick alike, would just rise and fall in synch with the market as a whole. But then perhaps this would be self-correcting as sophisticated investors would notice the pricing errors, create managed funds and the cycle would start anew...