The grim, grey editorial pages of the Wall Street Journal have become a field of glory, with flashing knives, slings and arrows, as famous academics battle to defend the besieged Efficient Market Hypothesis and the purity of Index Funds.

	The Battle of the Academics

In an editorial published on June 27, 2020, Burton G. Malkiel joined with John C. Bogle of the Vanguard Group, to fight for “capitalization-weighted indexing” against the insurgency of Jeremy Siegel, Eugene Fama, Robert Arnott, and Kenneth French, proponents of a heretical notion of “fundamental-weighted indexing”.

Professor Siegel Throws Down A Glove

Professor Jeremy Siegel had opened the fray by an earlier editorial in the Wall Street Journal of June 14, 2020, proposing that index funds should be weighted on the basis of dividends rather than market capitalization.

Professor Malkiel replied with haughty disdain, calling for caution before accepting the Johnny-come-lately “new paradigm” of “fundamental-weighted indexing”, since this would imply that the “old paradigm — reflected in more than $3 trillion of capitalization-weighted index investment funds — is in error”

Joining Professor Malkiel in the defense of capitalization-weighted indexing was none other than John C. Bogle, who, as patriarch of the Vanguard Group that manages $340 billion in index equity assets, has a very, very large dog in the fight.

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Mutual funds are sold primarily on the basis of ‘performance’ measured by historical ‘total return’.

The famous Morningstar rating system is based on ‘total return’, in this case ‘risk-adjusted total return’ relative to funds of the same asset category.

The average American mutual fund investor is accumulating resources for retirement, say 20 or 30 years hence. The typical owner of mutual funds is unsophisticated and does not delve deeply into the significance of Morningstar ratings or total return figures.

The SEC allows promoters of mutual funds to trumpet historical ‘total returns’ as long as there is a disclaimer that “past performance is not necessarily indicative of future performance”.

A question worth considering is this: “Are investors being mislead by statistics on total return?”

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Security prices in capital markets are not independent of investment theory.

A useful academic overview of the field of ‘investment theory’ can be found in the hyper-text book, “An Introduction to Investment Theory“, by Professor William N. Goetzmann of Yale University School of Management.

There is no single ‘investment theory’.

Capital Flow Analysis is one of the modern theories competing in the marketplace of ideas.

Under the ‘investment theory’ category on Capital Flow Watch, I have filed some comments on various investment theories that are useful in understanding market behavior.