[n72]

There are companies which will fairly obviously perform well in the future. However, because of active investing, this projected performance gets priced in, so they aren't a bargain. If the whole world except one active investor invested in indexes, then the active investor would have a very easy time, since that projected performance wouldn't be priced in and the stock would be a bargain.

[OscarCunningham]

Who would that investor trade with?

[icebraining]

I'm not an expert, but index funds still purchase the stocks, so when the active investor bought a stock at an increased price, it would increase the market cap and so the index fund would buy some more of it from them.

[OscarCunningham]

Nah, because the value of the stock that the index fund already owned would also increase in the same proportion.

[icebraining]

Fair enough, for stocks the index already owned, but what about for the others? If the investor took a stock that wasn't in the top 500 and inflated its value above the 500th stock, wouldn't an S&P 500 index fund then buy it?

[n72]

It's a thought experiment.