What If Everyone’s Investing Wrong?

Get this: Eternal made just ₹527 Cr. in profit this year. And Avenue Supermarts made ₹3,673 Cr. That’s nearly 7x more!
And yet, Eternal is valued higher in the stock market!

Why? Because we’re no longer just rewarding performance. We’re rewarding presence.

Thanks to index investing, more money flows into stocks simply because they’re part of an index. It doesn’t matter if the business is underperforming or overstretched. If it’s included, it gets bought.

This is the quiet shift that index investing has triggered. And it’s changing how capital gets allocated; not always for the better.

When No One’s Asking Questions

Warren Buffett once said:

"In any sort of a contest, financial, mental or physical, it’s an enormous advantage to have opponents who’ve been taught that it’s useless to even try."

That’s exactly what indexing has led to! Most investors today are no longer asking: “Is this business any good?”  They just assume that if it's in the index, it must be worth owning. Result?

• No one’s digging into balance sheets. 
• No one's evaluating management.
• “Thinking” has been outsourced to an algorithm that doesn’t think.

Seth Klarman, known for his disciplined value investing, calls this mindset "lazy and shortsighted”. Because if a company is losing money, cooking books, or propped up by hype, but it happens to be in the index, it still gets bought.

And when something goes wrong? Index investors are often the last to know, because no one was watching closely in the first place!

The Overindexing Loop

As more investors switch to indexing, the system starts to distort. Seth Klarman puts it clearly:

“Indexing is predicated on efficient markets. But the more people index, the fewer there are left to do the hard work, research, analysis, price discovery. So ironically, markets get less efficient.”

And there’s another layer. When a new stock gets added to an index, thousands of index funds rush to buy it, not because it’s good, but because the index says so. With limited liquidity, prices can shoot up artificially, even if the business fundamentals haven’t changed at all.

What Happens If Everyone Indexes?

Indexing isn’t smart investing. It’s autopilot at scale, don’t you think? Here are the side effects of overindexing: 

• Distorted prices: Stocks go up just because they’re in the index. Not because they deserve to.
• Disconnection from fundamentals: Companies get capital not because they’re good, but because they’re included. Meanwhile, solid businesses outside the index remain overlooked.
• Broken price discovery: The fewer people doing real analysis, the less reliable prices become. Markets start to reflect flows, not facts.
• Blind spots in crises: When things go wrong, no one’s watching. Index investors are often the last to react because they were never really paying attention.

So where does that leave you?

Indexing isn’t bad. It’s just average by design. It’s built to match the market, not beat it. And value investors will eventually outperform the markets. So, if you're looking to do better, you’ll have to do what indexing avoids: ask questions, study businesses and think independently. 

We made Finology 30 with this in mind. We’re not trying to beat the index by being clever. We’re trying to stay a step ahead by doing what the index can’t: ask, “Does this company actually deserve my capital?”

Because when the herd is on autopilot, there’s real value in choosing the road less travelled.