A recent Wall Street Journal Op-Ed by former Vanguard board member and economics professor Burton Malkiel on the virtues of buy-and-hold investing, “Buy and Hold” Is Still A Winner,was another in a series of veiled advertisements for index funds.

A better title might have been, If You Can’t Beat ‘Em, Join ‘Em.

However, Malkiel uses the same tortured logic to make the case for indexing that he and Vanguard founder Jack Bogle have been making for decades: namely that it’s impossible to find active managers who can beat the market after costs, and that market timing is impossible.

I strongly disagree with the former. And I think Malkiel’s selective arguments about the latter call his bias into question, not to mention his academic rigor.

Let’s take on the market-timing question, or rather, Malkiel’s arguments about market-timing, first. Malkiel rightly claims that no one has been able to consistently time the market’s ups and downs, and that those who try often end up doing most of their buying near market tops, and their selling near market bottoms.

But he then makes the case for “buy and hold” by using an incredibly one-sided statistic. Malkiel claims, and I’ve verified, that an investor in the U.S. stock market who bought and held over the 15 years from 1995 through 2009 would have earned an average annual return of +8%. Fair enough. He then says that if that investor had missed the 30 best days in the stock market, that return would have been negative. Also true.

However, he neglects to mention two other facts. The first is that the investors who missed the 30 worst days rather than the 30 best over that 15-year period would have earned a return of almost +21% per annum, or more than two-and-a-half times the return of the buy-and-hold investor.

But more importantly, of those 30 best and 30 worst days, 42 of them, or 70%, occurred in 2008 and early 2009. 18 of the 30 worst days and 13 of the best days over the past 15 years occurred in 2008, while 6 of the worst days and 5 of the best days occurred in 2009.

An investor who simply bought and held for the first 13 years of Malkiel’s period and sold at the end of 2007 would have earned better than +11% per annum. Of course, where that investor would be in 2010 is unknown, and that’s the rub with market timing.

But why Malkiel chose this particular 15-year period, or chose to make the specious argument about missing 30 great days in the market, is beyond me. The market-timing argument stands on its own.

Now, on to the issue of indexing’s superiority over active management. When you boil down all the arguments about the superiority of indexing, there is absolutely no factor that makes indexing better than active management other than cost. It isn’t diversification, because index funds own as many lousy companies as they do good ones. And it isn’t low turnover, since many active funds can be found that have low turnover management styles. The single factor that gives indexing an advantage over active management is the size of the operating expense headwind.

When stock market index funds can be run for 10 or 20 basis points, versus an industry average of about 100 basis points, that’s an 80 or 90 basis point (0.80% or 0.90%) advantage that goes straight to the indexer’s bottom line. (I should note that the 100 basis point average expense ratio is an asset-weighted figure. The simple average of all stock funds’ expense ratios is closer to 1.50%, or 150 basis points, but the asset-weighted figure is a better representation of what investors are actually paying.)

While a 90-basis point headwind is substantial in a low-return investment environment, it is hardly impossible to overcome. And, if you restrict your investing, or the majority of your investing, to funds with below-average expense ratios, such as those from, say, Vanguard or Fidelity, your chances of finding managers who can outperform their benchmarks improve greatly.

Theory is great, but the proof is in the pudding. It’s been almost 20 years since I first began writing The Independent Adviser for Vanguard Investors and providing suggested Model Portfolios using, in many cases, actively managed funds in lieu of index funds. The numbers bear out that these portfolios, and the managers of the funds I’ve focused on, can and do beat the market over time.

I should note that the Growth Model Portfolio often allocates some assets to bond funds (typically short-term funds), which help to reduce volatility. But otherwise, the assets are heavily weighted toward actively managed equity mutual funds.

The average holding period for this portfolio, again according to Hulbert, is 1,314 days, or about 3.6 years. That means turnover runs about 28%. That may be higher than the turnover of +5% or so for a large-cap index fund, but the results are that the portfolio earned +2.5% per annum over the market over the almost 19 years Hulbert measured. It was Jack Bogle, in his book, Bogle on Mutual Funds, who wrote, “Seemingly small differences in annual rates of return can result in enormous differences in total return over long periods of time. Do not ignore the magic of compounding.”

Can one find great managers running low-cost funds that, over time will outperform the stock market? In a word, yes. And many of those managers are identified, month after month, in The Independent Adviser for Vanguard Investors.