Most of an index's returns come from a tiny fraction of its component stocks (e.g., 7% of the Russell 3000). The goal of indexing isn't just diversification; it's a strategy to ensure you own the unpredictable "tail-event" winners, like the next Amazon, that are nearly impossible to identify in advance.

Contrary to popular belief, the market may be getting less efficient. The dominance of indexing, quant funds, and multi-manager pods—all with short time horizons—creates dislocations. This leaves opportunities for long-term investors to buy valuable assets that are neglected because their path to value creation is uncertain.

Counter to conventional value investing wisdom, a low Price-to-Earnings (P/E) ratio is often a "value trap" that exists for a valid, negative reason. A high P/E, conversely, is a more reliable indicator that a stock may be overvalued and worth selling. This suggests avoiding cheap stocks is more important than simply finding them.

While institutional capital market assumptions align with objective, yield-based models, their actual portfolio actions can deviate. Many institutions, despite models suggesting caution on expensive US stocks, maintained market weight, benefiting from the prolonged bull market. This highlights a critical inconsistency between their stated process and real-world behavior.

Unlike physical sciences where observation doesn't change the subject, the stock market's behavior is influenced by participants watching it. A market can rise simply because it has been rising, creating momentum loops. This "self-awareness" means price and value are not independent variables, a key distinction from more rigid scientific models.

The underperformance of active managers in the last decade wasn't just due to the rise of indexing. The historic run of a few mega-cap tech stocks created a market-cap-weighted index that was statistically almost impossible to beat without owning those specific names, leading to lower active share and alpha dispersion.

Contrary to classic theory, markets may be growing less efficient. This is driven not only by passive indexing but also by a structural shift in active management towards short-term, quantitative strategies that prioritize immediate price movements over long-term fundamental value.

Contrary to the belief that indexing creates market inefficiencies, Michael Mauboussin argues the opposite. Indexing removes the weakest, 'closet indexing' players from the active pool, increasing the average skill level of the remaining competition and making it harder to find an edge.

The dominance of passive funds and hyper-short-term pod shops has doubled the average stock price movement in the REIT space. This increased volatility creates opportunities for long-term investors to capitalize on exaggerated market reactions to minor news.