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Index investing is the best path for individual investors, right? Maybe not.

Regular viewers of Wall $treet Week with FORTUNE know all about the practice of investing in a fund that mirrors a market index. Some of our recent guests have included Burton Malkiel, the Princeton University professor who first brought efficient market theory to the masses; Gary Gensler, a former Treasury official and Goldman Sachs executive who co-wrote a book blasting actively-managed mutual funds as investing traps; and Gus Sauter, chief investment officer for the Vanguard Group, which runs the biggest index fund of all.

But this week you'll hear from a man who believes that index investing is flawed and that "formula type investing" is anything but sure. Robert Olstein, who runs the Olstein Financial Alert Fund, believes index investing is a failed attempt to simplify the complicated process or portfolio management.

He knows a lot about that topic, judging by his long-term record. According to Morningstar, the Olstein fund since its inception in 1995 has outperformed its mid-cap value category and the S&P 500 every year but one. On the other hand, it's worth noting that since Olstein first appeared on this program on Sept. 27, the S&P 500 has risen more than 21 percent, while the six stocks he mentioned for that broadcast have seen their share prices rise 18.9 percent on average; just two of them, Walt Disney and LSI Logic, outgained the S&P 500, with increases of 39 percent and 33.6 percent, respectively since that September show.

Olstein points out that one of the drawbacks of index investing is that index funds must be fully invested in stocks, at least in the case of the most popular indexing vehicles, which are tied to the S&P 500 and other popular stock market indices. That's great when the general stock market direction is up, but when the market goes does as it has over the past three years, shareholders suffer because they didn't have the choice of moving money into cash or interest-bearing bonds.

Indexing also artificially inflates stock prices, Olstein argues. Funds that mirror an index must buy the same stocks that make up that index, even if those stocks are overvalued. In fact, the very act of including stocks in an index can cause them to become overvalued. Olstein cites Yahoo as an example: Standard & Poors' announcement of Yahoo's inclusion in the S&P 500 was made one week before the actual shift, giving traders an opportunity to drive the share price up before unloading it to fund managers that had to include the Web company's stock in their portfolios. Olstein calculates that that run-up in price added one quarter of one percent to the index funds' cost. And that phenomenon is repeated every time S&P alters the makeup of its widely-followed index.

Proponents of index investing say their funds' low turnover results in lower capital gains taxes, but Olstein says that lack of turnover can mean greater risk in a volatile stock market environment. As a result, many new fund shareholders were rudely awakened in 2000 when long-time investors took the money made from the bull market and ran. Inexperienced investors were stuck with a huge tax bill on profits that they didn't enjoy - even as their fund investments continued to decline.

Olstein believes you should sell overvalued stocks and look for better stocks that will appreciate. In his view, investment decisions should take priority over tax decisions. Yet index funds can't sell overvalued stocks, and in many cases have to buy more overvalued shares as the market as they rise to stratospheric levels. Olstein says index funds have turned into "momentum" funds -- they were the biggest buyers of Enron, WorldCom, Lucent and the rest of the rogues' gallery.

Criticisms of indexing largely rest on its results in a bear market. But what does Olstein think about the current environment? He says we're in a period similar to the 1970s and early 1980s; the market in 1982 was at the same level as in 1974, though there were large up-and-down moves within that eight-year period. Olstein believes the economy has very little pushing it, but also not much holding it down, so it's important for investors to look for value and excess cash flow.