I've been reading The Intelligent Investor by Benjamin Graham. The book talks about how it is best to invest in a wide range of stocks (such as through an index fund) in order to decrease the risk of one or two stocks performing badly and damaging your ivestments.
Graham urges investors to hold a wide range of stocks for the long term instead of actively trading a handful of stocks.
At first glance, this seems like a good idea. The general index markets have consitently risen for many decades even though individual stocks have risen and fallen repeatedly. It is true that a person who put all of their money in Microsoft would have done very well, but a person who put all of their stock in Enron will have nothing left in their investment portfolio.
From a purely financial point of view, I don't se a big problem with being a passive investor.
However, I also have been reading a book by William Greider called the Soul Of Capitalism. The book makes the basic point that the market has no morality. Because the market has no inherent morality, profitable decisions are made with no respect for how people and society are affected.
Greider argues that stockholders are supposed to be the owners of a business. If we are the owners of the business, then we, as stockholders, should be held responsible for the actions of the companies we own. Due to "limited liability" laws, stockholders are not held responsible for the actions of the companies we own.
In many cases, CEO's cut employee benefits, dump massive amounts of pollution into the air, and cheat on their financial reports in the best interest of shareholder value.
This "shareholder value" is being used as an excuse to do things we may not agree with in order to make us more money.
Being a passive investor has two main flaws from my perspective. First, we own a part of many companies we know very little about. Second, since we need to know very little about the fundamentals and actions of the businesses we own, we also know very little about the fundamentals of investing.
Passive investing may be a good investment strategy, but it leads to more ignorant shareholders.