The math says that before costs, index investors must get the same returns as the average active investor. But, index investing has lower costs giving the edge to index investors. Because most active trading is done by professional investors, it’s not surprising that the evidence says that after costs indexing will outperform investing with the average professional. But few people understand this. Most people will never believe that they can get better returns than a brilliant professional can. After all, professionals in almost all other fields do better than amateurs.
But what if there was a way to get advice from not one or two, but all professional investors? We could have all the professionals in the world get together and average out their best picks. Most people would be more than happy to follow this collective advice from the best investing minds. But how could we possibly convince all the professionals to get together like this?
Of course we can’t, but this is a trick question. It turns out that the index is the (weighted) average of all professional investors’ best picks. Buying low-cost index funds is like hiring every professional investor in the world, but only paying for a small fraction of one of them.