I'm guessing this is worse due to the super high valuations of these companies? Mag7 make up like 1/3 of the S&P 500. Even if you buy a low cost index fund with the goal of diversification, your portfolio still includes a lot of this stuff.
The "in aggregate" is doing some heavy lifting here. Active management holds concentrated positions in certain investments because they think they will outperform. Active folks believe they have found market inefficiencies, whereas passive folks lean towards the market being (relatively) efficient (enough) and chasing returns won't work (at least for most people):
* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
"Active" and "passive" exist on a spectrum and are not binary:
Active rarely outperforms… after fees:
> […] We're a hundred students into class, 99 people make a left shoe, one person makes a right shoe. One of the students in the class made a right shoe." And then I say, "A pair of shoes goes for $100." I also made a left shoe. And so I approached the only person with the right shoe and they said, "Karl Marx said that how much time you spent making something determines its value. We both spent the whole day making it. I propose that we both get 50 bucks and then we sell the one pair of shoes."
> And then regardless of who the student is or what their political beliefs are, by the way, they always turn down that offer. They immediately say, "No way, you're not getting $50 for this." And I say, "Well, explain to me why you feel that that's the case." And then they say, "Well, I have all negotiation power because they're 98 other people in the class that I could go to for a left shoe. I have the thing in short supply, you have the thing in large supply. So who gets all the rents?" Then I say, "Well, how much do you think the person with the right shoe gets?" And invariably the class comes to the conclusion that it's somewhere between 99 and a hundred dollars, so that almost everything goes to the person who has the one right shoe.
> And so after saying that, I say to them, "Well, to do investment management, I need two inputs. Instead of the left and the right shoe. I need investible money and I need mutual fund managers skill. Now tell me which one of the two is in short supply." And so very quickly they come to the conclusion that having investible money makes you in no way special, because everybody has investible money. And so it's very difficult to call that a skill in short supply. The skill of the manager is something that is in short supply. Who is going to go home with the rents from this process? Just like the right shoe owner, they go home with everything, the manager goes home with everything. And so the value added is entirely absorbed by the manager in terms of fees. Which by the way is exactly the same reason for why the net alpha is zero. Because in this left and right shoe example, the net alpha is the amount of money the left shoe owner goes home with.
I forget the name of the yt channel, but they did an interesting interview with Vanguard reps. The reps said that active funds will often need to liquidate assets they will sell at a discount to an index fund directly that will buy it anyway. They don't want to sell to the public market as that would reduce the value of their assets still on the books. In this way a passive fund can take advantage of an active fund and is one of the reasons why many active funds struggle to beat a passive one year after year.
If you are an index investor, the bet is that the economy (and the market) will eventually recover. Which historically it has:
* https://awealthofcommonsense.com/2023/05/the-stock-market-is...
Incorrect. Success is predicated on not panicking and staying the course:
* https://awealthofcommonsense.com/2023/05/the-stock-market-is...
Even if there are bubble(s) and they burst, or there are crashes for any other reason, you can succeed:
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
If things were as simple as you suggest absolutely nobody would invest in individual stocks.
Which "market"? Equities? Which of those? US, Canada, Europe, other, all? Bond market? Government, corporate?
Your goals, timeline, and risk profile should determine the contents of your portfolio.
> If things were as simple as you suggest absolutely nobody would invest in individual stocks.
It is as simple as I suggest, and most people should not invest in individual stocks:
* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
In fact, it's arguably worse than deliberately investing in them, because you're completely indifferent to the soundness of their business model. The hope is just that through the magic of "efficient markets", someone else will arbitrage your errors away. I don't know if there are enough takers for a bet of this size.
Companies have value: at the very least they can be liquidated and their assets sold off (book value). They also tend to generate profits and may choose to distribute them (dividends, share buybacks): this also has value to shareholders.
Where the random walk comes in is that the information of how healthy or profitable a company is gives it a (perceived) value of $x. But new information can be learned at any point about the company which can change the (perceived) outlook of its health and profitability, which may give it a value of $y. Now it could be that x>y or x<y.
It is the fact that this new information (real, rumoured, fake) can come at any random point in the future:
* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
For value funds, price-earnings ratio, price-to-sales ratio, and indeed dividend yields are indicators commonly used for scoring (there's also price-to-book, but that's a bit unfair to tech companies). Even when the fund doesn't use yields, it's an easily accessible proxy metric most of the time.
More importantly, all of these things aforementioned companies score terribly at.
N.b. I wouldn’t recommend it for various reasons, but it exists.