Oops. My Apologies to John Bogle--and to Paul Samuelson
By David Henderson
David Henderson’s “A Nobel for the Random Walk of Stock Prices” (op-ed, Oct. 15) describes me as “one high-profile beneficiary of Mr. Fama’s insight,” allegedly inspiring my founding of the Vanguard 500 Index Fund in 1975.
This is untrue. Perhaps to my shame, I didn’t even learn of Eugene Fama’s “efficient market hypothesis” (EMH) until a decade after my creation of the 500 Index Fund. Rather, I was inspired by another Nobel laureate, economist Paul Samuelson, who in his 1974 essay in the Journal of Portfolio Management demanded “brute evidence” that active money managers could beat the market index. Such evidence has yet to be produced.
Numbers-crunching economists like Mr. Fama represent the “quantitative school” of indexing who came to believe in stock-market efficiency. In fact, he inspired the founding of Dimensional Fund Advisors (DFA), which follows, not an indexing strategy, but a strategy based on persistent undervaluations of various market segments. Mr. Fama continues to serve on the DFA board.
The “pragmatic school” of indexing, on the other hand, simply amassed vast statistical evidence showing that the returns earned by active managers seldom outpace the S&P 500 Index. Further analysis showed that the failure of active fund managers was a result of the costs they incurred. The average manager is average, but only before all these fund operating expenses, advisory fees, turnover costs and sales loads. After those costs, active management becomes a loser’s game. It is the “cost matters hypothesis” (CMH) that assures that investors in low-cost index funds win the battle for superior returns.
So writes John Bogle in today’s Wall Street Journal, in response to my Tuesday piece on the Nobel laureates.
Come to think of it, when the late Armen Alchian taught us about efficient markets, he emphasized Samuelson over Fama. What can I say other than: I blew it.
BTW, here’s my post on Samuelson after he died.
And here’s the response I wrote to Mr. Bogle on the Wall Street Journal site:
Thanks for your correction, Mr. Bogle. My apologies for misrepresenting the source of your thinking. Also, thanks for setting up the fund. In my retirement investments, I’ve been a big beneficiary.