Passive investing now dominates Australian markets. Andrew Coleman and Mark Lamonica explain the real impact on prices, volatility, and your investing edge.
Introduction: When the Market Stops Asking Questions
For most of the history of financial markets, prices were set by investors who were actively trying to assess the worth of a business. They read annual reports. They modelled earnings. They visited companies. They argued about valuations.
That is no longer the dominant force in either the Australian or US stock market. Today, more than half of all invested capital in both markets follows an index — buying and selling based on rules rather than research. The question for any serious investor is: what does this mean for prices, for volatility, and for the opportunities available to those who still do the fundamental work?
This week on Wealthy + Wise, Andrew Coleman (Teaminvest), Mark Lamonica (Morningstar) and Angus Geddes (Fat Profits) took a clear-eyed look at exactly that question. Here is what they found.
Passive Investing: Scale and Structure
Index investing — buying a basket of stocks designed to track a benchmark like the ASX 200 or S&P 500 — dates from the 1970s when Vanguard founder Jack Bogle introduced the concept. Today, it represents more than half of total invested capital in Australian and US markets.
The logic is simple: most active managers, after fees, underperform the market. If you can’t reliably beat the index, why pay more to try? For individual investors, particularly those without the time or resources to do deep fundamental research, passive products have been a genuine improvement over expensive, underperforming active management.
But the scale of the shift has created structural consequences that are only now becoming clear in the academic literature.
What the Research Shows About Price Discovery
A 2024 paper in the Journal of Management Science (Salmon et al) found that the rise in passive ownership over the past 30 years has caused the amount of information incorporated into stock prices ahead of earnings announcements to decline by approximately 25% of its historical mean. In other words, prices are increasingly less reflective of what a careful analyst would conclude about a business’s prospects.
Separately, research referenced on the program (Passive Investing and the Rise of Megafirms) found that the 50 largest US stocks outperformed by 29% more than they should have over a 24-year period — purely as a result of passive flows directing disproportionate capital to the largest companies.
Andrew Coleman’s own 2025 analysis of the ASX found similar dynamics: companies in the ASX 100 were trading at a 40% premium to comparable companies outside the index. Companies in the ASX 200 showed a 26% premium; the ASX 300, 23%. This “index premium” represents price being driven by inclusion, not intrinsic value — and is, by definition, unsustainable.
Rising Volatility Around Reporting Season
One measurable consequence of reduced price discovery is increasing intraday volatility around earnings announcements. When fewer investors are doing the analytical work required to anticipate a result, the result itself becomes the first moment the market processes the information — creating larger price swings.
Data presented on the program shows that intraday volatility around ASX reporting season has increased by approximately 40% since February 2022. This aligns with what theory would predict: in a market where most capital follows rules rather than analysis, earnings surprises become larger and more frequent.
The Active Investor’s Edge
For investors who maintain a disciplined, fundamentals-first approach — the kind practised by Teaminvest members using the Conscious Investor® methodology — this structural shift creates a significant, durable edge.
“If you know that the vast majority of the market is buying or selling based on things other than the fundamentals, your edge by understanding those fundamentals has just materially increased,” Andrew Coleman explained on the program.
The comparison he used is instructive: playing poker at a table where most of the other players are not looking at their cards. This is not arrogance — it is simply the logical consequence of having done the work when others have not.
Contrarian Thinking in Practice
Angus Geddes, CEO of Fat Profits, approaches the same problem from a contrarian perspective. His firm specifically seeks out under-owned, out-of-favour stocks — businesses that have fallen from favour, where institutional coverage is light and the index weighting is small.
“By definition, the uncrowded trade is often a safer proposition,” he explained. “When something’s been going down for a while and starts bottoming out on bad news and becomes really under-owned by the broader market — that’s when it gets really interesting.”
The CSL example illustrates the point. After a disappointing earnings result, a previously crowded stock was sold aggressively. For a patient, fundamentals-focused investor, that kind of indiscriminate selling — driven by passive flow rebalancing and momentum strategies rather than any change in the underlying business quality — creates buying opportunities.
The 18-Month Rule and Teaminvest’s Approach to Volatility
One of the most practical frameworks Andrew Coleman offered was what might be called the 18-month rule: the most loved sector in the market this year will almost always be the least loved next year — and vice versa.
“If you’ve missed out on one of these trends,” he said, “wait 18 months. The thing that was up will be down and the one that was down will be up.”
For Teaminvest members, this is not a prediction — it’s a permission structure. If you missed a great company at fair value six months ago because the price moved too fast, that’s not a reason for distress. It’s a reason to keep the stock on your research list. The price will come back. It always does.
This is consistent with the core Teaminvest philosophy: research slowly, move fast when the price is right, and if you miss the window — know that another one will open within 12 to 18 months.
Practical Implications for Self-Directed Investors in 2026
The current market environment — following a sharp geopolitical event in early 2026 that accelerated the repricing of many high-multiple stocks — has created exactly the kind of conditions the Teaminvest methodology is designed for.
Businesses with no debt, strong management, and consistent earnings growth that were previously too expensive are now trading at materially lower price-to-earnings multiples. The companies haven’t changed. The multiples have. And for investors who know these businesses well — who have done the slow research — the time to act is now.
Andrew named several specific businesses he considers currently mispriced: Jumbo Interactive, ResMed, REA Group, Objective Corp, NIB Holdings, CSL, and Smart Group. Each meets the core Teaminvest criteria: high return on equity, little or no debt, capable and ethical management, growing earnings. All are now available at prices that would have seemed attractive 18 months ago.
Conclusion
Passive investing has been genuinely beneficial for many individual investors — lower fees, market returns, simplicity. But at scale, it changes market dynamics in ways that serious investors need to understand.
Prices are less accurate. Volatility is higher. Index premiums exist and are compressing. Great businesses occasionally get caught in indiscriminate selling and become available at sensible prices.
For the disciplined, patient, fundamentals-first investor — this is not a problem. It is the opportunity.
Watch the full episode of Wealthy + Wise here: Episode 8
Watch individual segments on the Teaminvest Wealth Builders channel
Learn more about the Teaminvest membership here
