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The money in an index fund is used to purchase shares of all the equities in the index. The underlying intrinsic value and performance of those equities will never be considered by the shareholders.
As many are quick to point out, most big cap stocks are currently heavily overpriced. For example, Pepsi currently costs $38.67 per $1 of profit today. Who would pay that price for a company that only grows ~8% per year at best? Its top three shareholders are Vanguard, State Street and Black Rock.
How much of the blame for overpricing goes to passive investors who shovel money into everything regardless of its value or performance? I'm perfectly guilty of this myself of course.
Passive investors dream of cashing out on that compounded 9.1%/year growth of the S&P 500 over time, and we can all backtest and see that past performance. But we can't really backtest the ever-increasing observer effect that index investing must have over time.
To get to the point, at what point does the S&P 500 simply track the performance of index funds and render the stock market a meaningless Ponzi scheme? Or have I simply gone bonkers to think about this, and if so, what am I missing?
Charlie Munger has often pointed out that index investing doesn't work if everyone does it. Are any economists studying the notion that index investing itself is poisoning the market averages that seem harder and harder for stock pickers to beat every decade?
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