I agree with Andrew, I think it's something we've all secretly known for some time. The human condition is to trust experts, accept the received wisdom and do what we are told. The truth is that stocks are tied to companies, companies are controled by humans and humas are unpredictable...in the short term. We seem to somehow steadily improve over the long run, but it's in fits and starts.

Six words for those who insist that no one can outperform the market over the long term.

The Oracle of Omaha - Warren Buffett.

Andrew, thanks for that article. My own finacial adviser recommended index funds for my super fund, and I think its so far demonstrated the benefit.

Regarding Warren Buffet, his strategy is not the same as an ordinary investor trading in the market. He is like a venture capital firm, investigating companies carefully and getting involved with board-level management. He invests in the medium to long term, so does not make the small traders mistake of letting transaction costs eat the gains the stock makes.

The cognitive traps of recency bias, self-serving biases and confirmatory bias lead us small fry astray very easily, but the better one's understanding of business management and of the balance sheet and talent involved in a particular business, the less the cognitive traps mislead.

By buying index funds, you are averaging your bets on the people best able to assess and manage the businesses - the markets for assessing information, and the management to manage their own business.

ChrisPer said: "Regarding Warren Buffet, his strategy is not the same as an ordinary investor trading in the market. He is like a venture capital firm, investigating companies carefully and getting involved with board-level management. He invests in the medium to long term, so does not make the small traders mistake of letting transaction costs eat the gains the stock makes."

Any ordinary investor can replicate his strategy, if not his scale (at least not at first). Anyone can trade long term and not get whip-sawed by volatility. The smart money was in buying quality stocks on the dip this week. If the market dips again next week or the week after, smart money will be in again too.

By investing in index funds, you make an average return (by definition), as you correctly state. My point is that it is possible to outperform that average, long term and there are people that do. Buffett is one, Kerr Neilson of Platinum here in Australia is another. Anyone can buy units in his fund, thus can access his strategy.

When you buy the index, you get good stocks as well as bad. Value investors look for good stocks that get beaten down on market psychology (eg, this week) and buy them when they are (relatively) cheap.

Random walk is all very well, except people (and crowds) do not react in random ways, they react in predictable ways and often the contrarian trade to the panicking mob is the best one. Index funds can never give you exposure to such trades. They are however, great for people who don't have time to do the research, or don't have the guts to pull the trigger when the world seems to be ending.

Quote:"Random walk is all very well, except people (and crowds) do not react in random ways, they react in predictable ways and often the contrarian trade to the panicking mob is the best one. Index funds can never give you exposure to such trades. They are however, great for people who don't have time to do the research, or don't have the guts to pull the trigger when the world seems to be ending."

Absolutely. Most of us who dcide to try it pay lip service to the strategies, but fail to to consistently follow them, generally not keeping up the homework or resisting emotion. I am pleased to abdicate that responsibility for my investment, as I wasn't good at it!