This assumption that passive investors have no cash inflows / outflows totally breaks his model. As soon as passive investors start buying or selling the index -- a real world necessity -- they are playing a zero sum game against a counterparty. Specifically, active investors could sell overpriced stocks to indexers and buy underpriced stocks from indexers, which in turn drives the price discovery. This churn allows for active investors, as a group, to gain alpha at the expense of indexers.<p>Piggybacking off the article's example: Suppose news breaks that Facebook has made a catastrophic legal error which will result in them losing 50% of their revenue over the next year. This is obvious to the active investors who collectively decide to sell their Facebook shares, resulting in a fall in the total value of the index equal to the drop in value for Facebook. In the time it takes the old pre-news price to drop to the new post-news price, active investors have, on net, sold Facebook and gone to cash and will have shared in a relatively small portion of the crash, and passive investors will have bought Facebook due to churn, or held Facebook as part of the index, resulting in them absorbing a larger portion of the crash than active investors.<p>So how does this all fit into the "active managers don't earn their keep" narrative? I think what we've seen is a long term drop in the alpha available to the active share due to things like narrowing spreads, faster response to new news, etc. So effectively active management is in a secular decline, which allows for (1) bad results for active managers on net, and (2) failure of poor performers and their removal from the market, and (3) continued real value generation by the better and remaining active managers. So this idea of conservation of alpha is also silliness because the market will always be slightly oversaturated (net negative value for money managers) or undersaturated (net positive value for money managers).<p>If you doubt this, read Ben Graham's the "Intelligent Investor" -- In 1949 he thought it was quite easy (EASY!) for an average Joe to earn outsized returns with a little stock research (and I think history proved him right until at least the late '70s).