Q:  I heard an investment joke that seems to be a valid critique of index fund investing.  I’d like your response.  The joke goes something like this, “A stock picker and an index fund investor are walking down the street.  The stock picker suddenly stops, points to the sidewalk below, and says ‘Hey, look, there’s a $20 bill.’  As he bends over to scoop up the found money, the index investor says, ‘Don’t bother.  If that were a real $20 bill, someone would have picked it up already.’”  What is your response?

A:  We always get a laugh out of that joke.  The point of it, of course, is that the index investor is such a fervent believer in efficient markets that he cannot possibly entertain the idea that such easy-pickings actually exist.  Our stock-picking colleagues probably like the joke even more, as it suggests active managers routinely spot such opportunities, thus “winning” at the expense of disbelieving index investors.

Ignoring the legitimate question of whether the $20 bill was found due to luck or skill, the simplest response is actually another question:  Is it a worthwhile economic pursuit to comb the streets looking for $20 bills?