The Fundamental Theorem of Investing

-NO AI is used in writing this post!-

While I don't have the proof I believe there IS a proof of, what I call: 

The Fundamental Theorem of Investing

Given any market that is 1-attributable, 2-non-opaque, 3-open, 4-free, 5-well formed, 6-where all participants are price takers, and 7-has positive skew (a long term history of rising prices); then, 

A broad based index will outperform active management. 

The proof, if it exists, may be something like this:

The broad based index is always long.

Any active manager must not always be long.

Any active manager must at times be flat or short. 

Any active manager has costs and friction that long only investors do not.

Every flat position has zero return but can avoid long only losses.

Every short position has positive and negative return.

In axiom 7, a positive skew market, the sum of upticks is greater than the sum of downticks.

Therefore, active managers can only beat the index if the sum of avoided downticks + "short downticks" is greater than all the ticks in the market-this may be a contradiction. Therefore the theorem holds. Ok, ok, as I said, this may not be a proof.

In other words, is the return of the flats and shorts enough to avoid the losses of long only and end up beating the long only return? It may be concievable but there is no "public" "audited" "freely available" evidence for this. Is there a fund, in history, that has done this? This is the unlikely prospect facing all active managers. 

And "average" investors, with limited time, capital and no special access to information can easily WIN 70-90% of the time by just buying and holding the largest, lowest cost and most liquid investment in the world. 

Caveat: a stock picker, anytime, can always hit the jackpot and beat the market but does it last? It's kind of like gambling as any long-term holder of Penn Central, Western Union, GE, US Steel, Ford, GM, IBM, Yahoo, AOL, Cisco and Intel (among many others) can tell you. 

One last but major point: Indexing, as beneficial to investors as it may be, if it becomes the dominant investment theme in the market, will end up as a major systemic threat to the entire financial system. The system is based on the concept of rationing, of separating winners from losers and winnowing losers from the market. If too many investors never sell, well, we lose the system that picks winners from losers and that, if it ever happens, is a threat to the system.