The Uncanny Ability to Recognize the Obvious

Article excerpt

Remarks of the Founder and former Chief Executive of The Vanguard Group on receiving the 2005 Outstanding Financial Executive Award from Financial Management Associates International (FMA) Chicago, IL, October 15, 2005.

I'm deeply honored to receive your 2005 Outstanding Financial Executive Award. Coming as it does from a global organization renowned for its development and dissemination of knowledge and financial decision making; it's a very special treat. I'm profoundly humbled to stand before so many of you, among the most noted finance academicians, investment practitioners, and policy makers in the field, and bask today in the reflected glory of the true "stars" of our field who have previously won this coveted award.

Confession being good for the soul, I'm also somewhat surprised to be your choice for this prestigious award. While I have spent nearly five and one-half decades in this field-including more than three decades as the leader of two wonderful mutual fund management organizations (Wellington in 1965-1974 and Vanguard in 1974-1996), I have never thought of myself as a particularly competent executive-an assessment that I imagine my long-suffering colleagues shared. But I was always surrounded by a crew-bless them all, not just the higher-ups-who knew how to get the things done that needed to be done.

I also confess that while I've been enlightened, indeed often transfixed, by the scores-no, hundreds-of articles I've read in the academic journals over the years (mostly the Financial Analysts Journal and the Journal of Portfolio Management; much of your own Financial Management journal is well over my head) and even written nearly a dozen myself, my intellectual credentials fall far short of those of most of you here today. Truth told, when I see a page that is filled only with formulas-Sigmas and Deltas and Lambdas-to the near exclusion of text, I move quickly on to the next article.

Continuing my confessional litany, I have little knowledge of the convoluted intricacies of financial analysis and accounting standards, and have not done investment research on stocks and bonds since my early years as a rookie in this wonderful field. Worse-or, come to think of it, betterl-I created a method of investing which deliberately and purposefully ignored analysis, accounting, and research. For in substance, the index mutual fund simply buys the entire stock market portfolio-blue chips, blithe spirits, downtrodden dogs, and even bankruptcy candidates-and holds it for Warren Buffett's favorite holding period: "Forever."

Of course I didn't invent the idea of indexing. (I'm not sure any individual did.) But the founding of the world's first index mutual fund in 1975-initially "First Index Investment Trust" and now "Vanguard 500"-was, I think, a seminal moment in the history of indexing. Although nearly two decades were to pass before its position in the mutual fund firmament was largely accepted, we can now say that the original heresy that was indexing has at last become dogma. Proof? Known as "Bogle's Folly" at the outset, it is now the largest mutual fund in the world. Including its sister "500" funds, its first cousin "5000" stock index funds, its brother bond index funds, and its in-law index sector funds, investors at Vanguard have some $375 billion invested in passive strategies, one-half of the long-term assets we supervise.

I. Indexing as the Core

Whatever the case, using the index mutual fund as the core-if not the entirety-of a diversified equity portfolio is now dogma in college and business school finance classes, and I thank you for that. It is advocated, as far as I can tell, by almost every American who has won the Nobel Prize in economics. And most recently, even the leader of one of America's most successful endowment funds-Harvard-sang, indeed shouted, its praises. Here's what Jack Meyer said: "The investment business is a giant scam. Most people think they can find fund managers who can outperform, but most people are wrong. …