[lbo-talk] a paradox

[Seth Ackerman]

Here's a paradox I can't figure out the answer to. It's common wisdom 
among sober investor types that stock picking doesn't work. You're 
better off putting your money in a broad index fund and leaving it 
there. Yet these same sober investment types are presumably passionate 
believers in the orthodox notion that corporate managers ought always to 
be thinking about how to maximize "shareholder value" and that the best 
way to force them to do so is by using the discipline of the capital 
markets.

But here's the paradox. If the capital markets consisted of everybody 
just parking their money blindly in index funds and not engaging in 
active trading, where would the external discipline on managers come 
from? How would shareholder value objectively manifest itself? It seems 
like you can *either* have everybody pursuing a rational investment 
strategy but with no shareholder discipline on managers *or* you can 
have shareholder discipline that is exerted by millions of people 
inefficiently trading stocks and therefore doing worse than if they had 
put their money in index funds. But you can't have both.

What's the solution?

Seth