Tell Warren Buffet that, Paul. I'm not being facetious; have a look at the long term track record of Berkshire Hathaway, which Buffet and Munger have effectively run as an actively managed mutual fund with steady insurance premium float to fund new purchases. Since Malkiel popularized Efficient Market Theory in "A Random Walk down Wall Street" in the 70s, (I know, others originated the theory), lots of people have bought into it, but that doesn't mean it's valid; even Malkiel admitted in the most recent edition that sometimes efficiency is suspended.

Google Buffet's essay "The Superinvestors of Graham-and-Doddsville", which he originally wrote as an introduction to one of the editions of Ben Graham's "The Intelligent Investor"; I'd guess it's available online somewhere. He reviews the long term track record of several of Graham's students and colleagues (inclduding himself), all of whom beat the indexes consistently for decades using Graham's approach to value investing, and he argues pretty persuasively against efficient markets. I believe that all of those investors have continued improving their relative outperformance in the decades since the essay was published, and there are some excellent newer funds out there achieving similar results with the same approach (e.g. Longleaf Partners, LLPFX, which I believe is closed to new investors). Another fund to have a look at is the Hussman Strategic Growth Fund, HSGFX (www.hussmanfunds.com), which I've been a happy investor in since it was founded in 2000. The fund has a short track record, but it's covered a couple of market cycles during that period and soundly beaten the S&P.

Another concern about investing in index funds is our current position in the very long term bull/bear cycle in US equity markets. If you go back to the turn of the last century, US markets have alternated between 15-20 year secular bull and bear markets (i.e. 1982-2000 - bull, 1966-1982 -bear, etc.). Over the same time, essentially all of the long term return in the US market has come during the bull periods, while the bear periods have esssentially been flat. Under this perspective, we've been in a secular bear cycle since 2000, and we will be until 2015-2020. Threre will obviously be short term bull and bear markets within the larger cycle - I know, the Dow just made a new high, though not in inflation-adjusted terms - but the more representative S&P is still well below it's 2000 high and NASDAQ's a nightmare.

I agree that most actively managed mutual funds suck, for a lot of systemic reasons, and the average investor would be better served in an index fund or ETF during a longer term bull cycle - index investing was a great play in the '80s and '90s. Still, it's not impossble to beat the averages with a bit of work, and given our place in the larger cycle, I really wouldn't want to be investted in an index fund for the next decade or so.

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