Reader CP had this succinct analysis of the trouble with indexing as an investment strategy:
I think that, in practice, index investing means:
“Treat cash like it’s toxic and buy a little bit of everything at the asking price.”It’s an idea which has happened to enter a positive feedback loop and thereby generated attractive retrospective returns since 2009. (Although the price appreciation of the S&P since 2007 has only been about 4% a year not counting dividends!)
Buying everything at the asking price would not work or be considered a valid strategy in any type of wholly owned and operated business. Imagine if you just bought every [retail operation] at the asking price.
Actually, people do this from time to time, it’s called a roll up and the stock price chart looks like the market chart now – a parabola followed by a huge crash. Dendreon’s problem was that they levered up and bought every pharma company they could for asking price.
So I don’t see why or how buying pieces of businesses at asking price will do anything except transfer value to the sellers, i.e. result in losses, which will be crystallized someday, for the buyers.
A House Rises 