Costs always matter, so pick this winning read
I was lucky at the start of my investment career. In 1985, I was appointed manager of a fund with an undistinguished track record.
So when, shortly after, my employer increased annual fees on its fund range mine was exempted. This was a decent gesture to disgruntled investors and turned out fortuitously for me. Subsequently, I succeeded in holding that fee, while those across the rest of the industry went up and up. By the end of my tenure, 13 years later, my fund started each year with a 0.75 per cent performance head start over many competitors. That might not sound much, but over 13 years it adds up, particularly because saved fees roll up in the fund and compound in value. My performance benefited accordingly.
John Bogle has always understood this – “Costs always matter” (p104) is his mantra. Low fees make obvious sense for investors, but really should too for fund management companies because the superior returns they help deliver are good for business.
Mr Bogle is also a noted proponent of index funds and everyone should read, mark, learn and inwardly digest his arguments. What is interesting, though, is why these arguments for indexation have not wholly prevailed. Why do people still try to pick actively managed, higher-cost funds? Mr Bogle suggests index funds are less profitable for investment advisers and so are marketed less enthusiastically – a cynical but telling thrust. Or just that “hope springs eternal”. (p116).
This “hope”, implicitly dismissed by Mr Bogle as naive, provides a deeper critique of indexation. Many people assume stock markets exist to make investors richer, but actually this is just an accidental and by no means certain outcome.
No, from a socio-biological perspective stock markets exist to provide a forum where new ideas to improve the lot of humanity are tested. The railroads, automobiles, the internet or biotechnology required stock market manias, with their distasteful greed and madness, to get commercialised.
But if everything was indexed, if all investors simply passively owned existing corporations there would be less testing and less progress. The excesses, the insanity, the “hope” are integral to markets and necessary for them to do their job. Mr Bogle is right – picking winners is “a losers’ game”, (p19) – but markets do not just function at the level of individual rationality. Their wisdom is that of the crowd and what may not make sense for the individual can for the collective.
Published by Wiley Investment Classics
Nick Train is a co-founder of Lindsell Train
