Can this go on forever? Highly doubtful. While indexation is efficient and effective, there has never been a really good idea on Wall Street that hasn’t been taken to a foolish extreme (mortgage-backed securities, triple-levered exchange-traded funds, or smart beta). The situation is reminiscent of the old tale about the poker-game host who admonishes his friends, saying, “Let’s all play our cards carefully and maybe we can all make some money tonight.”
Just as only 10% of investors can be in the top decile, so inevitably the continuing rise in passive investing will create both winners and losers.
Frederick “Shad” Rowe of Greenbrier Capital Partners in Dallas has a good piece at Barron’s this weekend about how it may soon become profitable for investors to start distinguishing between good and mediocre stocks once again. Try to get to it.