I use the quotations because generally the people touting these the most (John Bogle) are also ones selling the index funds. Being biased doesn't mean they're wrong, but it does mean they may not be telling the whole truth.
I understand the idea that index funds are better than managed accounts. Lower fees, probably better returns, etc. etc., but generally when this topic is discussed those are the only two options considered as if they were the only investment options out there. I also agree that they probably make a lot more sense as "fire and forget" type investments for people to invest as passively as at all possible.
But are investment funds really all that much better than just buying stocks for long term investing? Index fund fees may be incredibly low, but they're still yearly fees. Whereas with a stock you can (in theory) purchase a significant ownership stake in a company for $5 and it will cost you another $5 to divest. (Oversimplification, I know.)
Also major index funds may represent a more diverse investment, also in theory, but take for instance the S&P500 where 50 companies make up about half the market cap.
Why would it not make more sense to invest in a handful of these heavyweights instead of also having to carry the weight of the other 450 (some of which are mostly just baggage)?
Even Warren Buffet has been touting the index fund for a while now, but I haven't heard that Berkshire Hathaway has major holdings in an S&P500 index fund. So it seems like there's more to the story.
Where do you think the tipping point really is here?
Edit: had to be away from the computer most of the day. Don't mean to insinuate at all that index funds are bad. Just questioning whether they're the right call for someone willing to be active enough to check their investments a few times a year.
Edit2: Just because it seems like some people may still be misunderstanding me... the comparison that this entire question revolves around is long-term, mostly passive invesments in companies rather than almost all the eggs in the index fund basket. This may be a better way to think about it rather than my question of picking stocks... ie: "[PickaCompany] has historically done pretty well, their business models seems pretty good, people like their product, I expect them to continue making profit for a while, they have a large customer base and a good share of the market in their industry, they seem like a good investment." Oversimplification by far, but it's generally these things that put companies in index funds and at the top.