One of the most repeated investing statements today is:
"Just buy an index fund and forget about it."
For many investors, this is sensible advice.
But there is a question that deserves attention:
Can index funds fail?
The answer is yes.
Not because index funds are flawed.
But because economies, institutions and societies can fail.
To understand why, we must first understand what an index fund actually owns.
What Does An Index Fund Really Own?
Many investors think they are buying a financial product.
In reality, they are buying a piece of a country's business ecosystem.
When you buy an Indian index fund, you are indirectly buying:
- Banks
- Manufacturers
- Technology firms
- Consumer brands
- Energy companies
- Infrastructure businesses
The future of the index depends on whether these businesses become more productive over time.
If they do, investors prosper.
If they don't, investors suffer.
The Japan Lesson
Japan provides one of history's most important investing lessons.
During the late 1980s, Japan appeared unstoppable.
Its companies dominated electronics, automobiles and manufacturing.
Property prices surged.
Stock prices exploded.
Many believed Japan would dominate the global economy.
Then reality intervened.
The Japanese stock market reached extraordinary valuations.
Economic growth slowed.
Population growth stalled.
Deflation persisted.
The result?
Investors who bought near the peak experienced decades of disappointing returns.
Japan remained a rich, advanced nation.
But stock market returns did not match investor expectations.
Lesson
A great country does not automatically guarantee great stock returns.
Valuation matters.
Demographics matter.
Productivity matters.
Argentina: When Institutions Matter
Argentina has enormous natural resources.
Fertile land.
Agricultural strength.
Educated citizens.
Yet repeated cycles of:
- Inflation
- Currency crises
- Debt defaults
- Policy instability
have damaged long-term investor confidence.
Businesses struggle when rules change frequently.
Investors struggle when currencies collapse.
Lesson
Economic potential alone is not enough.
Stable institutions matter.
Venezuela: A Warning
Venezuela possesses some of the world's largest oil reserves.
Yet political and economic instability destroyed enormous amounts of wealth.
Natural resources could not compensate for poor institutions.
Lesson
Resources do not create prosperity.
Institutions do.
South Africa: Promise and Challenges
South Africa has:
- Strong financial institutions
- Deep capital markets
- Significant natural resources
Yet challenges such as:
- Slow growth
- Energy shortages
- Political uncertainty
have limited long-term economic momentum.
Lesson
Even sophisticated markets require sustained economic growth.
The United States Success Story
Why has the American market performed so well over more than a century?
Because America repeatedly produced:
- Innovation
- Entrepreneurship
- Immigration
- Capital formation
- Productivity growth
The companies changed.
The system endured.
Railroads gave way to automobiles.
Automobiles gave way to computers.
Computers gave way to software and artificial intelligence.
The economy kept reinventing itself.
This adaptability became the ultimate moat.
Historically, broad American equities have delivered roughly 9–10% annualized returns over very long periods.
Using the Rule of 72:
At 10%, money doubles approximately every seven years.
That is extraordinary.
Why Some Countries Win
Long-term stock market success often comes from five factors:
1. Population Growth
More workers.
More consumers.
More entrepreneurs.
2. Productivity Growth
Workers produce more value each year.
3. Rule of Law
Contracts are respected.
Property rights are protected.
4. Capital Markets
Businesses can raise money efficiently.
5. Innovation
New industries replace declining industries.
Countries possessing these traits tend to create long-term wealth.
Why India Has An Edge
India is not guaranteed to succeed.
But it possesses several advantages that investors should appreciate.
Demographic Strength
India remains one of the world's youngest major economies.
Many developed countries face aging populations.
India still has a large working-age population entering the workforce.
Entrepreneurial Culture
Every town contains entrepreneurs.
Every city contains small businesses.
This culture continuously generates economic activity.
Democratic Institutions
India changes governments through elections rather than revolutions.
Policies may change.
Debates may be intense.
But institutions have shown resilience across decades.
Digital Infrastructure
India has built remarkable public digital infrastructure:
- Aadhaar
- UPI
- Digital payments
- GST integration
These systems improve economic efficiency.
Formalization
Increasing numbers of businesses are entering the formal economy.
This benefits tax collection, productivity and corporate growth.
Why India Could Still Fail
Investors should avoid blind optimism.
Several risks exist.
Poor Education Outcomes
A young population is only an advantage if properly educated.
Employment Challenges
Economic growth must generate meaningful employment opportunities.
Excessive Bureaucracy
Complex regulations can reduce entrepreneurial energy.
Fiscal Mismanagement
Unsustainable government borrowing can create future problems.
Geopolitical Risks
External shocks can disrupt growth.
Overvaluation
Even great countries can produce poor returns if investors pay absurd prices.
Japan demonstrated this clearly.
The Most Important Lesson
Index funds do not create wealth.
Businesses create wealth.
Index funds simply provide ownership of those businesses.
When evaluating an index fund, investors should ask:
- Is the country becoming more productive?
- Are institutions improving?
- Are businesses innovating?
- Are citizens becoming more prosperous?
If the answer remains yes for decades, compounding becomes possible.
The Omaha India Perspective
An index fund is not merely a basket of stocks.
It is a bet on a society.
A bet that:
- Children will be educated.
- Entrepreneurs will build businesses.
- Workers will become more productive.
- Institutions will remain functional.
- Innovation will continue.
When these conditions exist, compounding can be extraordinary.
When they disappear, even index funds struggle.
The lesson is simple:
Do not invest only in an index.
Invest in the future of a country.
And always remember that great returns ultimately come from great societies producing great businesses over very long periods.