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The Financial Crisis in Perspective (Collection) by Mark Zandi, Satyajit Das, John Authers

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Chapter 3. Indexes and Efficient Markets

“The investment management business is built upon a simple and basic belief: professional managers can beat the market. That premise appears to be false.”

Charles D. Ellis, Financial Analysts Journal, July 1975

Index funds are a great idea for most investors, but the more they grow, the more inefficient they make the market, and the more they encourage investors to move in lockstep. They are based on academic theories on efficient markets which breed a psychology of overconfidence, that inflates bubbles.

Index funds—normal mutual funds that merely match the returns of an index, rather than trying to beat it—are dull staple products that make investing much cheaper for small savers. But they have only ...

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