This website lays out a thorough and elaborate analysis of how capital markets work. However, to give you a preview, here is the short version. Please read it once without clicking the links, then go back and review the links. Otherwise, you will be so distracted that it will take several weeks to get to the tenth point.

1. Market Randomness and Active Management:
Markets are moved by news. News is unpredictable and random by definition. Therefore, the markets movements are unpredictable and random. However, this market randomness does have a positive average of about 10%/year because capitalism works (celebratecapitalism.org audio and text). Active managers who have claimed to outperform a market average or index have also implied that they have the power to predict tomorrow’s news. But since it is impossible to consistently predict the future, the results of active managers are unpredictable and random. This concept is known as the Random Walk Theory and it was first discussed in The Theory of Speculation, a paper written in 1900 by Louis Bachelier. In 1964, MIT Professor Paul Cootner published a 500 page collection of research papers on the randomness of the market titled, The Random Character of Stock Market Prices. In 1965, Nobel Laureate in Economics and MIT Professor Paul Samuelson wrote his now famous paper, Proof That Properly Anticipated Prices Move Randomly. Also in 1965, University of Chicago Professor, Eugene Fama wrote his highly regarded papers, Random Walks in Stock Market Prices, and The Behavior of Stock Market Prices. After carefully reading this extensive collection of peer-reviewed research, you will be convinced of the randomness of stock market prices.

2. Skill or Luck:
The average actively managed investment must underperform the indexed investment, when all costs are deducted. [source] Those actively managed investments that beat the indexed investments fail to consistently beat the index in the future. The reason for market beating performance in a random market is simply due to luck and not due to a skill that is repeatable. Research shows that only about 3% of active managers beat an appropriate index over a 10 year or longer period. Needless to say, it is nearly impossible to predict those winners in advance. Lucky investors are well advised not to expect a continuation of their good fortune. [see 1, 2, 3, 4, 5, 6, 7, 8]

3. Index Portfolios Best Capture Risk and Return:
Actively managing your money will create higher risk and lower returns than a globally diversified, tax-managed, and small value tilted portfolio of index funds. Due to commissions, management fees, margin costs, taxes, stock randomness, and market efficiencies, you will slowly transfer your money into the pockets of stock brokers, mutual fund managers, hedge fund managers, and the many other individuals profiting from your numerous transactions and your lack of understanding of free market principles. Active management is hazardous to your wealth. A recent study by Brad Barber of the University of California, Davis, showed that 82% of the 925,000 active traders on one stock exchange lost $8.2 Billion/year from 1995 to 1999. Dalbar Research stated in their 2005 report on Investor Behavior that the average equity investor earned a paltry 3.90% annually for the last 20 years, compared to 3.0%