In fact, so-called "passive" index funds completely ignore the subject of valuation. They simply follow the market wherever it goes, without adhering to the traditional approach of the "active" investor, who discriminates between different opportunities in an attempt to bet on the best.

The flow of capital into index funds is so great that it ends up dictating share prices. Worse still, since index funds generally base their asset allocations on market capitalizations, they naturally tend to concentrate on all overvalued stocks, while neglecting undervalued ones.

Take the case of two listed companies whose fair value - for example, what a potential strategic buyer would pay - is $1 undervalued with a market capitalization of $500 million, and the second is overvalued with a market capitalization of $2 billion.

When an index fund allocates its resources on the basis of market capitalization, it will invest four times more in the latter than in the former. The result is that the already overvalued company becomes even more overvalued through the influx of new capital, while the undervalued company remains undervalued.

Theoretically, this example illustrates the risk of profound market distortion induced by the domination of index funds, and by extension of the traditional supply and demand dynamics that once governed them.