1) The first thought experiment seems to set out to dis/prove the ability of active investors to outperform. It concludes that the existence of active investors will not make market prices more efficient. Those are completely different and independent issues.

I picture my self outperforming at the expense of 25 year old guys who have borrowed money to invest. The possibility for one class of active investors to outperform is not discredited by any conclusion that this will not make the market more efficient. I don't agree that "dumb money is unnecessary and illogical".

2) I don't believe the conclusion of the second thought experiment is determined by some difference in math between money-weighted and holding period returns calculations.

I would present the first issue in the second thought experiment as a dispute of the basic model used by W Sharpe in his famous argument at http://www.stanford.edu/~wfsharpe/art/active/active.htm. He draws circle around just the total of all traded stocks but ignores cash. Almost all investors buy and sell cash along with securities. In my experience trading cash is the easiest and most impact-ful way to beat the market.

3) The other point could be presented as Sharpe's failure to appreciate that companies go bust, go public, IPO, and pay dividends. In other words profits are made by cash moving between the primary and secondary markets. It is the active investor who will reap profits from trading on the fact that companies' relative values do NOT stay steady, and eventually the truth will out with either a cash transaction, or cash moving to the secondary market.