INSIGHTS
JAN
21
COSTA’S CORNER
A penny saved is a penny earned.
While we enjoy a small break from the daily grind of business as usual, maybe we should reflect a little on those we have lost.
Today, is a national celebration of the birth of one of the greatest Americans, Dr. Martin Luther King. Dr. King was a champion of non-violent change to the status quo. He believed, like the founders did, that all Americans, be they black, white, brown or yellow, were all created equal and should be treated as such. I’m sure if he were alive today, he would be both pleased and disheartened with the progress that has been made and the work that still needs to be done. Change, it seems, takes much longer than we would ever imagine.
This brings me to a different type of champion that we lost this week, Jack Bogle. Founder of Vanguard and maybe the most influential money manager of all time. What Mr. Bogle believed is the costs of investing were too high. Investors were paying a lot of fees for mediocre and sometimes very poor performance and he had a better idea.
He championed low cost investing and created entry points into his funds that almost everyone could afford. While large mutual fund groups had fairly substantial minimum investments, Bogle’s Vanguard Funds lowered that entry point to a then unheard of $2500 and low cost investing took off.
No one really knows how much his low cost investing strategy saved investors over the years but estimates range from 250 billion to 500 billion dollars. That savings stayed in the pockets of his investors to be invested for their future and the strategy was nothing short of game changing. With money flowing into Vanguard funds at a record pace, other funds started lowering their cost structures and entry points but with bloated infrastructures, the toll was heavy on these fund managers and drastic cuts came from top to bottom. Those cuts changed the industry in ways seen and unseen. Wall Street firms that had gotten fat on the largesse of these mutual fund companies cut back and changed their business models totally to adjust for the lowered revenue from mutual fund companies. With this discount model taking hold, discount brokers became more popular and continued to erode the profit margins of the big Wall Street firms. These firms did not sit still as major revenue streams dried up, they invested heavily in technology to cut their costs so they could be competitive while still offering a suite of services clients expected.
All of these factors created an environment that traders like to call “The race to Zero”.
This race they are referring to is getting goods and services for as close to nothing as possible. Low commissions, free trades, free data, free research all started because John Bogle felt that people were paying too much for something that could be obtained at a much lower cost.
The one thing that he would not sacrifice in his move to lower trading costs was service and quality. By cutting fat, paying substantially less for executions, keeping research in house, Bogle’s Vanguard group became the go to fund group for anyone interested in investing for their future.
The biggest achievement of Bogle’s career and probably the most important creation in finance was the development of the index fund.
Vanguard started the first index fund at the end of 1975 and no one thought it would succeed. The idea was simple, take an index, weight its components as the index weights the components and invest according to the weighting. So if you invested $1,000 in an S&P index fund, that $1,000 would be split up based on the percentage breakdown of each stock in the underlying index.
Simple. It gave people the opportunity to invest in the “market” without having to figure out how to buy each stock and was not geared to any one group of stocks in the market like, let say, a Value stock fund might be. Ingenious and it became wildly successful.
Vanguard kept the entry level low here as well so almost anyone could invest in “the Market”.
Bogle’s commonsense and humility made him that once in a lifetime visionary that changed the way we invest and proved that creating a successful business model and doing the right thing by your customers is not a mutually exclusive concept.
Almost makes me want to up my stock allocations.
Not yet.
50% Stocks
25% Fixed income
25% Cash
While we enjoy a small break from the daily grind of business as usual, maybe we should reflect a little on those we have lost.
Today, is a national celebration of the birth of one of the greatest Americans, Dr. Martin Luther King. Dr. King was a champion of non-violent change to the status quo. He believed, like the founders did, that all Americans, be they black, white, brown or yellow, were all created equal and should be treated as such. I’m sure if he were alive today, he would be both pleased and disheartened with the progress that has been made and the work that still needs to be done. Change, it seems, takes much longer than we would ever imagine.
This brings me to a different type of champion that we lost this week, Jack Bogle. Founder of Vanguard and maybe the most influential money manager of all time. What Mr. Bogle believed is the costs of investing were too high. Investors were paying a lot of fees for mediocre and sometimes very poor performance and he had a better idea.
He championed low cost investing and created entry points into his funds that almost everyone could afford. While large mutual fund groups had fairly substantial minimum investments, Bogle’s Vanguard Funds lowered that entry point to a then unheard of $2500 and low cost investing took off.
No one really knows how much his low cost investing strategy saved investors over the years but estimates range from 250 billion to 500 billion dollars. That savings stayed in the pockets of his investors to be invested for their future and the strategy was nothing short of game changing. With money flowing into Vanguard funds at a record pace, other funds started lowering their cost structures and entry points but with bloated infrastructures, the toll was heavy on these fund managers and drastic cuts came from top to bottom. Those cuts changed the industry in ways seen and unseen. Wall Street firms that had gotten fat on the largesse of these mutual fund companies cut back and changed their business models totally to adjust for the lowered revenue from mutual fund companies. With this discount model taking hold, discount brokers became more popular and continued to erode the profit margins of the big Wall Street firms. These firms did not sit still as major revenue streams dried up, they invested heavily in technology to cut their costs so they could be competitive while still offering a suite of services clients expected.
All of these factors created an environment that traders like to call “The race to Zero”.
This race they are referring to is getting goods and services for as close to nothing as possible. Low commissions, free trades, free data, free research all started because John Bogle felt that people were paying too much for something that could be obtained at a much lower cost.
The one thing that he would not sacrifice in his move to lower trading costs was service and quality. By cutting fat, paying substantially less for executions, keeping research in house, Bogle’s Vanguard group became the go to fund group for anyone interested in investing for their future.
The biggest achievement of Bogle’s career and probably the most important creation in finance was the development of the index fund.
Vanguard started the first index fund at the end of 1975 and no one thought it would succeed. The idea was simple, take an index, weight its components as the index weights the components and invest according to the weighting. So if you invested $1,000 in an S&P index fund, that $1,000 would be split up based on the percentage breakdown of each stock in the underlying index.
Simple. It gave people the opportunity to invest in the “market” without having to figure out how to buy each stock and was not geared to any one group of stocks in the market like, let say, a Value stock fund might be. Ingenious and it became wildly successful.
Vanguard kept the entry level low here as well so almost anyone could invest in “the Market”.
Bogle’s commonsense and humility made him that once in a lifetime visionary that changed the way we invest and proved that creating a successful business model and doing the right thing by your customers is not a mutually exclusive concept.
Almost makes me want to up my stock allocations.
Not yet.
50% Stocks
25% Fixed income
25% Cash