Interesting article. Would be great to have more absolute numbers in to validate important facts. Some articles state that active investing is still >95% vs. passive investing. Example in German: https://gerd-kommer.de/marktanteil-passives-investieren/
Isn´t the "real" appeal of passive investing that if you buy and hold "the market" (i.e. via an ETF), you automatically buy and hold the 2-3% of stocks that generate all the returns (famous Bessembinder study https://www.tandfonline.com/doi/abs/10.1080/0015198X.2023.2188870). In the long-run 80-90% of active investors underperform the market because their selection hold less than the 2-3% of stocks that generate all the returns.
That's exactly right—and it’s a critical point in understanding the appeal of passive investing. Passive investing’s strength isn’t its ability to cleverly pick winners, but rather its guarantee that you'll automatically hold these rare superstars without having to predict which they'll be.
However, there's an important nuance here: today's passive flows overwhelmingly favor stocks that have already succeeded, inflating valuations of established winners. Meanwhile, tomorrow's big winners—companies currently small and under-the-radar—may initially remain hidden precisely because capital is mechanically channeled into the largest names. This creates a curious distortion: passive investing, while highly effective historically, might be quietly delaying or obscuring the rise of the next Amazon or Apple, creating significant opportunities for active investors willing to hunt in neglected areas of the market. :)
Phenomenal piece! Well written and unique thoughts I haven’t heard before. Keep up the work, Javier!
Interesting article. Would be great to have more absolute numbers in to validate important facts. Some articles state that active investing is still >95% vs. passive investing. Example in German: https://gerd-kommer.de/marktanteil-passives-investieren/
Nice write-up.
Here's my write-up on the massive passive indexing bubble.
Isn´t the "real" appeal of passive investing that if you buy and hold "the market" (i.e. via an ETF), you automatically buy and hold the 2-3% of stocks that generate all the returns (famous Bessembinder study https://www.tandfonline.com/doi/abs/10.1080/0015198X.2023.2188870). In the long-run 80-90% of active investors underperform the market because their selection hold less than the 2-3% of stocks that generate all the returns.
That's exactly right—and it’s a critical point in understanding the appeal of passive investing. Passive investing’s strength isn’t its ability to cleverly pick winners, but rather its guarantee that you'll automatically hold these rare superstars without having to predict which they'll be.
However, there's an important nuance here: today's passive flows overwhelmingly favor stocks that have already succeeded, inflating valuations of established winners. Meanwhile, tomorrow's big winners—companies currently small and under-the-radar—may initially remain hidden precisely because capital is mechanically channeled into the largest names. This creates a curious distortion: passive investing, while highly effective historically, might be quietly delaying or obscuring the rise of the next Amazon or Apple, creating significant opportunities for active investors willing to hunt in neglected areas of the market. :)
Quite a hot and interesting topic, great insights, thank you Edel! Cheers!