Agreed on both accounts.

As for the thought experiment: I can’t really imagine how things would look if literally everybody were investing exclusively via buy & hold indexing. (Would there even be such a thing as stock prices?) But as long as companies earn profits, and as long as investors have a way to own a share of those profits, it seems that investing would be profitable.

In terms of if *everyone* bought and held passively, how would the index fund know what price to put on a stock if everyone was passive? That’s what I’m saying.

An index tracker as I understand it follows the index — i.e. the aggregate of all decisions on the value of all the listed companies by all active investors/decision makers (and passive buyers).

The value of an index tracker is you get this average decision making very cheaply, as you know. It’s not that there’s some other way to price stocks that an index fund follows (as you know, too ).

It’s a moot point because it will never happen — and if I was literally the last active investor left in the world I’m sure I’d make a fortune in weeks — but perhaps interesting theoretically. Although maybe I should discuss on my own blog rather than bothering you with it.

Apols if I’m still not making myself clear. Perhaps it’s one for me to ponder alone.

I’m not saying it needs to work if everybody does it, I’m saying it needs to work if everybody knows about it. (If everybody knew about a given technical analysis rule that had previously proven profitable, it would only take a handful of institutional investors using the strategy to eliminate its usefulness to me.)

Part of my reasoning is an acceptance of the fact that, by the time I find out about a given trading strategy, surely more than enough institutional investors have heard about it (before me) to have eliminated its profitability.

And for the record, you remember correctly. I do think buy & hold indexing would work if everybody was using it. The results and the lifetime experience of an investor would surely be quite different than they are now–in some good ways, some bad–but I think we’d continue to enjoy a share of the profitability of our companies.

(I’m v suspicious of tech analysis myself, for the record).

I’ve said before that if *everyone* passively invested, it wouldn’t work, but IIRC Mike disagreed. But it seems obvious – there has to be at least one active agent responding to earnings and putting a price on the stock.

So by this (admittedly stretched!) token, you could say passive investing doesn’t work because if everyone did it, it wouldn’t work.

(I wouldn’t say that, just extending that line of thinking!)

The same is true of fundamental analyses, and I don’t think the odds of being on the right side of a trade can be any different based on how one arrives at a decision (even using the dart board method).

I’m not defending either form of analysis, I just haven’t seen anything to indicate that one is more of a sham than the other.

I’m actually a fan of a variation of the dart board method … as Rick Ferri puts it, “buy the whole dart board.”

Technical analysis is always protrayed as the golden egg. All you have to do is by our program that automatically does it for you and you can be rich.

But if, as Rob claims, investors can accurately (at least enough to beat out “the Passives”) identify that critical P/E level, you won’t be able to sell at that level because no one will be buying, so the price drops until that situation is corrected. By then it’s too late. If we could find that magical valuation level, we couldn’t act on it; it would be gone the moment it happens (kind of like how you find out where the bullet is in Russian Roulette).

But if we are going to do it might as well add one more worm:

If we use PE/10 ==16 (or any constant) as a screen there is no adjustment for changes in the overall number of investors. Just adding more investors with rational demand curves would push up the price a stock should sell at. This isn’t a bubble or increased risk if the change in numbers is stable- say people in India start investing for their retirement.

-Rick Francis

The good news is that technical analysis is irrelevant to the average investor. If you invest for the long term, other rules are much more important than trading rules based on technical analysis.