Index funds have become successful since they've performed well compared to active investment funds. Why would the active investors suddenly get better at guessing the future?
As more of the market moved to indec funds, a smaller amount will be controlled by active investors, which will make the entite market dumber (I would say less efficient, but that would include the cost of managing the fund). As the market gets dumber, an active investor can make more profit without needing to be any better then he currently is.
At some point (in theory), the marginal profit one can make with an active fund will equal the added cost.
If you mean "current market values", then those are being set by the aggragate opinions of active traders. If there are less active traders, there is less brainpower being devoted to finding this consensus, so it would be suprising if the consensus did not get less accurate.
I don't really consider it possible for pricing to be "accurate". It is what it is, but accurate implies there's a correct valuation, which I don't think there is.
There is arguably an objectivly true answer for exactly what payments a given stock will make, and so there is an objectivly true answer for what the present value of the stock is (also dependent on other aspects of the future market). This is somewhat of a philosiphical question, largly boiling down to determinism; and is largly moot because no one claims to be able to predict the future well enough for this to work.
Instead, the working position that most take (at least implicitly) is that there is an objectivly correct probability curve of what the future payouts will be, and therefore an objectivly correct probability curve of present values. How to determine what this curve is is a matter of great debate. Further, there is a sufficient lack of objective methodology, that many of the factors that people use in this calculation would be refered to as "opinion", but there is still an objective reality out there.
However, this only gets us an (unknowable) objective probability curve of present values. In general, there is no objective way to turn this into a price. That is to say it is a matter of opinion how much a 50% chance of making $100 is [0].
In an ideal market, you would be able to sell a stock for its objective value at any time. However, "the market can stay irrational longer then you can stay solvent", so you may pay a premium for stocks that you expect to not be undervalued when want to sell them.
Conversly, you may by a stock not because you think it is worth what you are paying, but instead because you expect to find a greater fool to pay you even more then you paid.
There are also cases where people value stocks not just because of their future payments, but because they actually care about the company (or, in the case of divestment, people dont buy them becausr of personal preferences).
In short, there is some matters of opinion in determining a correct price; but most of the disagreement comes from a factual disagreement about what the future looks like.
[0] this calculus changes when you have many such gambles with varying degrees of corralation (and many a financial problem have stemmed from underestimating this corralation)
IOW, is there any practical difference between "there is no objectively correct price" and "we'll never know what it is"? The price at any given time reflects the current consensus of the objective price, distorted through the current average psychological lens of the market?
If something is unknowable before it occurs, we will never know what the objectively true measure is until it's occurred. At which point it changes, since the market is dynamic. How could we ever know which point is the correct price?
In theory, we can take a now worthless stock and look back in time to determine the actual present value at a given point in the past.
In theory, we can imagine an outside observer running an arbitrarily large copies of our universe from a given point in time to determine the probability curve at said point in time (under whatever model of randomness you want to use). More plausibly, we can take a set of predicted probability curves and look back to see how accurate they were (did events predicted with uncorralated 50% probability happen half the time?).
Economics is hard, because it is very difficult to determine these facts, even in retrospect, but they still exist.
If we can't know the truth, how do we know it exists (in this situation)? I'm not convinced there's an objective true value of a stock -- it seems like stock prices are the general consensus of a huge number of subjective inputs. And that will always be the case.
(Definitely appreciate the time and thought you've put into your responses, btw! Thank you.)
Once a company dissolves, we have enough information to do this calculation over the entire lifetime of the stock issue. At that point, we can determine what real value that stock had at any point in the past for the bearer.
This explains how value investors interpret stock value, but most traders are speculators that expect to make their profit by selling the shares on to someone else. They will only buy a share of stock if they believe that a future investor will buy it off of them at a higher price. This future investor will either be a value investor that expects to get the dividend returns or another speculator that is making the same calculation. Thus, even if a share of stock will pass through many hands before it lands in the portfolio of a value investor, that value investor is the only real price anchor, and the entire chain of speculators are ultimately trying to sell to him/her.
So instead if active fund managers "knowing the market better", we'll get active fund managers, "knowing the passive investor crowd better".
This is madness.
It may be possible that although they can't beat other active investors enough to justify their fees, they can beat a big dumb index fund enough to make their services worthwhile. That remains to be seen however.
Obviously we're not in either state, but presumably the closer we get to the latter state, the game gets a little easier for the active traders, not that that necessarily means they'll get a free "win"
Indexes holding shares have no influence on the price. The price only changes when traders trade.
When there is a majority buying/selling all the shares in block without any consideration to the differences in liquidity and fundamentals between stocks it may be easier to find opportunities than when everyone buys and sells individual stocks. (But one could also say that the average stock-picker is so bad that having more active investors actually increases the gain for the talented ones rather than pressuring profits due to competition).
For example, if you bought near the top in 2000, you were still underwater a decade later.