Why Indexing Used to Be a Good Idea

As we’ve seen, picking stocks is expensive—and that’s assuming you are good at it! Because stocks tend to move collectively, why not just buy all of them, or at least a lot of them, instead of going through the painstaking process of buying them one at a time? Why not let other people do the hard work, the heavy lifting of figuring out what companies are worth, for you?

If you believe in the power of consensus, this argument is quite compelling. The intellectual force behind indexing comes from Harry Markowitz, a Chicago grocer’s son who in the 1950s developed what came to be known as modern portfolio theory. In his youth, Markowitz was more interested in philosophy than finance. He was fascinated by the concept of uncertainty and how (from the work of the great Scottish philosopher David Hume) the mere fact that something had happened repeatedly in the past offered no assurance that it would repeat in the future.⁴