Trillions - Robin Wigglesworth

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Here is a summary of the key points in the book’s contents:

• The book chronicles the rise of passive investing and index funds, contrasting it with active fund management. It centers on a bet between Warren Buffett and Ted Seides on whether passive index funds could outperform hedge funds over time.

• It traces the intellectual origins of passive investing back to theorists like Louis Bachelier, Alfred Cowles, Harry Markowitz, William Sharpe, Eugene Fama and others who developed concepts like the random walk theory and efficient market hypothesis.

• It covers pioneers like John McQuown, Rex Sinquefield, and Jack Bogle who launched some of the first index funds and index-based investment strategies in the 1970s.

• It examines the growth of firms like Vanguard, Dimensional Fund Advisors, Wells Fargo, and later exchange-traded funds that popularized index investing for the mass market.

• It discusses the eventual triumph of passive investing over active management, as seen in Buffett’s winning bet, and the rise of giant asset managers like BlackRock that now dominate the investment landscape.

• Overall it chronicles the passive investment revolution that has reshaped modern finance and investing.

• Warren Buffett has long been skeptical of the ability of professional fund managers to consistently beat the market, believing most fail to add value beyond what an individual investor could achieve.

• In 2007, Buffett publicly proposed a $1 million bet that a low-cost S&P 500 index fund would outperform a portfolio of hedge funds over 10 years. Ted Seides, a hedge fund manager, accepted the wager.

• Seides was confident hedge funds could beat the market due to their flexibility to profit from both rising and falling prices and invest beyond just stocks. He saw them as better positioned than index funds to navigate coming storms.

• Buffett’s skepticism stems from the math - with fund fees, trading costs, etc., the average actively managed fund will underperform the overall market. Superior managers are rare.

• Buffett illustrated his point via a hypothetical national coin-flipping contest, where a tiny fractionguessed correctly due to luck, not skill. Similarly, some fund managers will outperform by chance.

• Though some skilled managers exist, Buffett advised investing in low-cost index funds rather than relying on the ability to identify superior active managers, as most will inevitably underperform.

• In 2007, Warren Buffett made a $1 million bet with hedge fund manager Ted Seides that an S&P 500 index fund would outperform a portfolio of hedge funds over the next 10 years.

• Buffett championed low-cost index funds that simply mimic the market, while Seides believed hedge funds could beat the market enough to justify their higher fees.

• Seides chose 5 funds-of-funds, which invest in a diverse array of hedge funds, to represent the hedge fund side. Buffett chose a Vanguard S&P 500 index fund charging just 0.04% fees per year.

• Initially, the hedge funds performed better during the 2008 financial crisis. But over time, the high fees charged by the hedge funds overwhelmed any outperformance, and the index fund steadily pulled ahead.

• By 2016, it was clear Buffett would win the bet, which was to conclude on his friend Jack Bogle’s 88th birthday in May 2017. Bogle had founded Vanguard in the 1970s and pioneered low-cost index funds.

• The bet illustrated how high hedge fund fees make outperformance versus the market unsustainable long-term. In contrast, low-cost passive index funds reliably generate market-matching returns.

• In May 2017, Jack Bogle attended the Berkshire Hathaway annual shareholder meeting in Omaha for the first time at age 88. His friend Jeremy Grantham arranged for Bogle and his family to fly there on a private jet.

• Bogle received a celebrity-like reception, with crowds of people wanting photos with him. At the meeting, Warren Buffett praised Bogle for the huge cost savings he has provided investors through index funds. Buffett said Bogle has saved investors “tens and tens and tens of billions” of dollars.

• This public praise was meaningful for Bogle as a recognition of his legacy. It was also a victory for Buffett, coming just after Buffett won his decade-long bet against hedge funds, proving index funds can outperform.

• The bet highlighted the broader shift towards passive index funds over actively managed funds. Assets in index funds have grown enormously, now totaling over $16 trillion in public index funds alone. The bet and shift towards indexing validates Bogle’s ideas that most active managers underperform indexes after fees.

Here is a summary of the key points about Louis Bachelier and his influence on the development of index funds:

• Louis Bachelier was a little-known French mathematician in the early 20th century. His work on probability theory and its application to stock markets was very ahead of its time.

• In 1954, University of Chicago professor Leonard “Jimmie” Savage discovered Bachelier’s book in the library and sent postcards to friends like economist Paul Samuelson asking if they had heard of him. This brought Bachelier’s pioneering ideas to the attention of influential economists.

• Bachelier made important contributions like modeling stock price movements as a ‘random walk’ and laying the groundwork for option pricing models. His ideas would later provide the intellectual basis for index funds.

• However, Bachelier was not appreciated in his own lifetime. He came from an unremarkable background, faced family tragedies, struggled academically, and his groundbreaking finance thesis only received an “honorable” grade from his supervisor Henri Poincaré.

• It was only decades later, thanks to Savage’s chance discovery, that Bachelier’s work spread more widely and economists recognized him as a visionary in mathematical finance. His ideas influenced later thinkers who helped develop index funds.

So in summary, the little-known Bachelier made pioneering contributions to finance theory that proved crucial in the later development of index funds, even though his brilliance was only appreciated much later after Savage rediscovered his work. Bachelier provided the vital intellectual foundation for index investing despite his obscurity during his lifetime.

• Louis Bachelier was a pioneering French mathematician who in 1900 published a groundbreaking thesis on the randomness of stock market prices. His work laid the foundations for the theory of random walks and modern mathematical finance, but was little appreciated in his time.

• Bachelier had a difficult career, lacking a full professorship until late in life and even being temporarily blackballed for an alleged error. He died in obscurity in 1946.

• In the 1920s, professional money managers like investment trusts were held in high regard. But after the 1929 crash exposed weaknesses, skepticism grew about their stock-picking abilities.

• In the 1930s-40s, Alfred Cowles III empirically studied the track records of financial newsletters, insurance stock purchases, and theories like Dow Theory. He found little evidence that any consistently outperformed the overall market.

• Cowles’ studies were landmark works demonstrating the challenges of predicting stock prices and the mediocrity of most professional investors. This set the stage for the later development of efficient market theory and ideas like index funds.

• Alfred Cowles was an influential economist who founded the Cowles Commission in 1932 to advance economic measurement and research. The Commission hosted many famous economists over the years and made important contributions, with several members winning Nobel Prizes.

• Cowles published an influential 1938 study collecting stock market data back to 1871 and creating an overall stock market index. This highlighted the rising importance of stock indices, which proliferated in the 1920s but remained primitive until computers allowed more sophisticated calculation.

• No one knew the actual long-term returns of the stock market until the 1960s. James Lorie of the University of Chicago led a project sponsored by Merrill Lynch to calculate returns dating back to 1926. The findings showed stocks returned around 9% annually, far higher than previously thought.

• This CRSP data was hugely impactful, allowing Merrill to advertise stocks as good long-term investments. It also revealed that the returns of mutual funds lagged the overall market, raising questions about their value.

• The CRSP database pioneered by Lorie enabled much future financial research and showed that most active investing strategies failed to consistently beat passive approaches over time. This laid groundwork for index funds.

• In 1950, Harry Markowitz was a PhD student in economics at the University of Chicago. A chance conversation with a stockbroker outside his supervisor’s office gave Markowitz the idea to write his dissertation on the stock market. This was an unconventional topic at the time.

• Markowitz went on to develop the theory of portfolio selection, which quantified the concept of diversification and showed how to construct an optimal portfolio to maximize returns for a given level of risk. This laid the groundwork for modern portfolio theory.

• Other key figures who built on Markowitz’s work include William Sharpe, who developed the capital asset pricing model (CAPM), and Eugene Fama, who expanded on the efficient market hypothesis.

• Together, their work showed that stock prices follow a “random walk” and that it is difficult for professional investors to consistently outperform the overall market after fees. This supported the idea of passive index investing rather than relying on active stock picking.

• The University of Chicago’s Center for Research in Security Prices (CRSP) database enabled empirical testing of these theories with stock market data. Studies based on this data found most active managers were unable to beat the market.

• Markowitz, Sharpe, and Fama all won Nobel Prizes for their contributions to the theory and evidence underlying passive index fund investing. Their work shifted conventional wisdom from relying on active stock picking to a more passive, diversified approach.

• Harry Markowitz, a PhD student at the University of Chicago, became interested in portfolio theory after being directed to study it by his advisor Jacob Marschak. He quickly had an insight after reading about valuing stocks based on expected future dividends.

• Markowitz realized investors should care about optimizing the balance between risk and return in an investment portfolio, not just chasing maximum returns. He proved mathematically that diversification across stocks with low correlation reduces risk. This became the foundation of modern portfolio theory.

• Markowitz moved to the RAND Corporation think tank before finishing his PhD. When defending his thesis on portfolio theory to University of Chicago faculty, Milton Friedman initially objected that it wasn’t real economics. After debate, Markowitz was awarded his PhD.

• At RAND, Markowitz met William Sharpe, who would build on his work. Sharpe simplified Markowitz’s models so they could be computed practically, and introduced the ideas of beta (relative volatility) and alpha (excess returns). This became the capital asset pricing model (CAPM).

• Sharpe struggled to get into finance after college due to his good grades, but became fascinated by economics. After the Army and getting programming experience at RAND, Sharpe collaborated with Markowitz and earned his own PhD.

• Markowitz and Sharpe’s innovations in portfolio theory and asset pricing formed the foundation of modern quantitative finance. Their work transformed investment management and won them Nobel Prizes.

• Eugene Fama, the son of Italian immigrants, studied economics at the University of Chicago after switching from Romance languages. He was influenced by Benoit Mandelbrot, who introduced him to Louis Bachelier’s work on market randomness.

• For his PhD thesis, supervised by Merton Miller, Fama used detailed stock market data to provide evidence for Mandelbrot’s theory that stock returns follow “non-normal” distributions and are nearly random. This corroborated earlier research by Mandelbrot and others.

• Fama showed that stock prices exhibit “fat tails”, meaning extreme price movements happen more often than a normal bell curve distribution would predict. He also found stock prices have no memory - the past cannot predict the future.

• This built on the earlier work of Bachelier, Mandelbrot and Samuelson in showing markets are close to random and hard to predict. But Fama sought to provide a “unifying perspective” and his detailed analysis cemented the idea in academic finance.

• Fama’s thesis formed the foundation for his hugely influential “efficient market hypothesis” which he developed in later work. This had a major impact on finance theory and practice.

• The University of Chicago was a major center of the academic rebellion against the investment industry in the 1960s. Chicago economists like Harry Markowitz, James Lorie, Merton Miller, Eugene Fama, and others developed pioneering theories like modern portfolio theory and the efficient markets hypothesis that challenged traditional Wall Street practices.

• The Center for Research in Security Prices (CRSP), created by Lorie and Lawrence Fisher at Chicago, produced comprehensive stock market data that enabled rigorous statistical analysis of markets. This fueled the quant revolution.

• CRSP’s data and the new academic theories were transmitted to the real world of finance through seminars attended by pioneering “Quantifiers” like John McQuown, Rex Sinquefield, and Burton Malkiel.

• Malkiel’s 1973 book A Random Walk Down Wall Street brought these academic ideas to the mainstream. It included the idea of passively tracking market indexes, rather than trying to beat them through stock picking.

• A race ensued between iconoclastic industry executives in Boston, Chicago, and San Francisco to launch the first index fund based on the new academic theories. This fund would disrupt the investment industry and reshape finance.

• In 1964, Henry McQuown was invited by IBM to present his preliminary research on using computers to detect patterns in financial data at a conference in San Jose. Ransom Cook, the CEO of Wells Fargo, was impressed and offered McQuown a job to establish an internal think tank called Wells Fargo Management Sciences.

• McQuown had an engineering background but became fascinated with finance and computers while pursuing his MBA at Harvard. His experience using computers at MIT to analyze stock market data made him an ideal candidate for Cook’s vision.

• Cook gave McQuown an ample budget of around $1 million a year and essentially carte blanche to explore new frontiers of finance. This patronage continued under the next Wells Fargo chairman, Richard Cooley.

• McQuown had an extraordinary drive and determination, which sometimes verged on impatience and bellicosity. But it enabled him to get things done, like becoming chief engineer on a destroyer at just 24.

• The Management Sciences unit was not formally part of Wells Fargo’s investment management business but tasked with exploring ways to improve various aspects of the bank’s operations. This skunkworks approach gave McQuown leeway to pursue breakthroughs.

Here is a summary of the key points regarding the profitability of lending to large companies versus the statistical risks of their defaulting:

• Lending to large companies can be quite profitable due to the size of the loans and interest payments. However, there are also risks of default that need to be considered.

• Statistical analysis can help quantify the risks of default for large corporate borrowers based on factors like financial ratios, macroeconomic conditions, industry health, etc. This allows lenders to better gauge the likelihood of repayment.

• Loans to large companies are generally less risky than small business loans, but there is still a chance of default. Diversification across many corporate borrowers can help mitigate this risk.

• The potential profitability of corporate loans needs to be weighed against the statistical risks. Lenders aim to find an optimal balance between risk and return.

• Defaults by large corporations can be very costly given the size of the loans. So lenders need to carefully evaluate each company’s creditworthiness.

• Overall, corporate lending can be profitable if the risks are properly analyzed and accounted for. Statistical analysis of historical default rates can inform better lending decisions.

• There was an intellectual war going on at Wells Fargo bank in San Francisco between Ransom McQuown’s Management Sciences department and Harold Vertin’s financial analysis group.

• Vertin was skeptical of McQuown’s quantitative methods at first, but McQuown assembled an all-star team of academic consultants like William Sharpe, Eugene Fama, Fischer Black, and Myron Scholes who produced convincing research.

• Black and Scholes laid the analytical groundwork for Wells Fargo’s efforts to create a “passive” index fund that would buy and hold the whole stock market.

• William Fouse was brought in as a “bridge between the theoretical new and the operating old” - someone who could translate the academics’ ideas into practical application.

• Fouse had an eclectic, brilliant mind as a former jazz saxophonist from West Virginia. He played a pivotal role in the indexing revolution at Wells Fargo.

• Despite initial resistance, Vertin was ultimately won over by the data and embraced the new quantitative methods. The intellectual firepower assembled at Wells Fargo in those years was unprecedented and paved the way for index funds.

• John “Mac” McQuown recruited Bill Fouse to Wells Fargo to help build an index fund based on modern portfolio theory. Fouse had previously tried and failed to convince his bosses at Mellon Bank to adopt these new ideas.

• Fouse, Myron Scholes, Fischer Black and others at Wells Fargo first tried to create an enhanced index fund called the Stagecoach Fund, but it was scrapped due to legal issues marketing mutual funds and lack of investor interest.

• Instead, an index fund prototype was created for the Samsonite pension fund in 1971, equal-weighting all NYSE stocks. But it proved too complex to manage.

• In 1973, Wells Fargo launched a simpler index fund for institutional investors based on just mimicking the S&P 500 index. It was the first true index fund open to outside investors.

• The roots of this innovation lie in the academic work coming out of the University of Chicago and pioneers like Harry Markowitz, William Sharpe, Eugene Fama and others. Wells Fargo successfully bridged theory and practice.

• Success has many claimants when it comes to launching the first index fund. Wells Fargo, American National Bank, and Batterymarch all started index funds for institutions in the early 1970s.

• Wells Fargo’s fund tracked the equal-weighted NYSE index, while the others tracked the S&P 500. None held every stock in the index due to costs and liquidity issues, so they used sampling techniques instead.

• By 1975, these funds were managing $150-200 million for pensions and endowments at fees around 0.3-0.6%. This was much cheaper than active managers.

• Wells Fargo earned the nickname “The Temple of Beta” for its pioneering indexing efforts.

• The investment industry largely scoffed at indexing early on, seeing it as a threat to active managers’ jobs and fees. Critics argued it would distort capital allocation and share prices if too widely adopted.

• Over time, former Wells Fargo skeptics like Vertin became converts once the evidence of indexing’s benefits accumulated. As McQuown put it, a “staunch enemy turned into a staunch advocate.”

• John B. Armstrong was the pen name used by John C. Bogle in 1960 to write an article ridiculing academic research showing fund managers do poorly compared to just passively tracking the market.

• Bogle was a young executive at Wellington Fund at the time and believed in active management outperforming indexes.

• Ironically, Bogle later founded Vanguard and became a zealous proponent of low-cost index funds, despite criticizing the idea earlier in his career.

• Bogle had an upper-class upbringing but his family’s wealth was devastated in the 1929 crash, turning his father into an alcoholic.

• This early hardship shaped Bogle’s views and drive to later reform the mutual fund industry.

• Bogle went from initially venerating the active money management industry to later crusading to transform it through low-cost index funds.

• The essence of Bogle was his single-minded determination, making him like a hedgehog that knows one important thing according to Isaiah Berlin’s famous metaphor.

• Jack Bogle had a difficult childhood due to his father’s alcoholism and womanizing, which caused emotional and financial hardship for the family. However, it instilled a strong work ethic in Bogle.

• Bogle’s mother ensured a good education for her sons, sending Bogle to the prestigious Blair Academy boarding school in New Jersey. Bogle excelled academically and graduated top of his class.

• Bogle was able to attend Princeton University on a scholarship. He struggled academically at first but improved his grades. His parents passed away during his time at Princeton.

• Bogle wrote his senior thesis on the mutual fund industry after reading a Fortune article. The thesis foreshadowed his later views on index funds.

• After graduating, Bogle was hired by Wellington Management Company, impressed by his thesis. He quickly rose through the ranks under founder Walter Morgan.

• In 1960, Bogle suffered his first of several heart attacks but continued working intensely. He married Eve Sherrerd in 1956 and they had 6 children.

• Bogle convinced Wellington to launch an equity fund in 1958, helping drive the company’s growth. However, Wellington struggled in the bull market of the 1960s, being too conservative.

• Wellington Management was a venerable investment company founded in the 1920s, but by the 1960s its market share was declining under Bogle’s leadership.

• In 1966, Wellington merged with Thorndike, Doran, Paine & Lewis (TDP&L), a young Boston investment firm managing the top-performing Ivest Fund. Bogle spearheaded the merger.

• Initially the merger was successful, with Ivest’s assets soaring. However, the two firms’ cultures clashed, with tensions rising between Bogle and the Boston group.

• The 1973-74 bear market was devastating for Wellington, with funds shrinking dramatically. Relations between Bogle and the Boston group deteriorated further.

• In late 1973, the Boston group moved to oust Bogle as Wellington’s CEO. At a board meeting in January 1974, Bogle proposed mutualizing Wellington but was voted out 10-1.

• Bogle refused to resign, so the board voted 10-0 to fire him. Robert Doran became Wellington’s new president.

• Bogle decided to launch a counter-coup by getting the boards of Wellington’s funds to appoint a new manager, with himself at the helm.

• After being ousted from Wellington Management, Bogle was allowed to start a new fund administration company called Vanguard. He chose the name Vanguard after seeing it referenced as the name of Admiral Nelson’s ship in a book of naval prints.

• Vanguard was incorporated in September 1974 with Bogle as president. It initially had 59 employees and administered about $1.4 billion in assets for Wellington funds like Wellington, Ivest, and Windsor.

• The creation of Vanguard received little attention or fanfare. Bogle was still very bitter about being forced out at Wellington.

• Though Vanguard was just responsible for administrative tasks like record-keeping, Bogle had bigger plans to try to gain control of distribution and investment management from Wellington Management. He wanted to transform Vanguard into a full-service mutual fund company.

• The press was critical of the messy corporate situation between Wellington and Vanguard, dubbing it “A Plague on Both Houses?” This angered Bogle, who wanted more recognition for Vanguard.

• Overall, Vanguard’s launch was met with obliviousness by the public, which pained Bogle. But he was determined to make Vanguard into something truly special despite the humble beginnings.

• In 1974, economist Paul Samuelson published an article arguing that most investment managers failed to beat market returns, lending support to the idea of index funds. This resonated with Bogle, who saw an opportunity for Vanguard given its unique mutual structure.

• Bogle was initially not as zealous about index funds and the inability of skilled managers to beat the market as he later claimed. But the index fund aligned well with Vanguard’s limited structure and desire for independence from Wellington.

• In 1975, Bogle and his team did analyses showing most funds underperformed the S&P 500 over long periods, further making the case for an index fund. The Vanguard board approved the idea despite concerns.

• Vanguard filed to create the First Index Investment Trust (later Vanguard 500 Index Fund) in 1975-76. It worked with index provider Standard & Poor’s and consultants to understand how to operate an open-ended index mutual fund, which was new.

• The fund was a strategic gambit by Bogle to gain independence from Wellington and the Boston managers who had ousted him. Though Bogle later championed index funds, the initial motivation was not a grand mission but a business maneuver in his ongoing war.

• Vanguard launched the First Index Investment Trust (FIIT) in 1976 as the first index mutual fund available to the general public. It was designed to track the S&P 500 index.

• The initial public offering raised only $11.3 million, far short of the $150 million target. This was seen as a failure and the fund was dubbed “Bogle’s Folly” in the press.

• With the limited capital raised, FIIT could only buy about 280 of the 500 stocks in the index, focusing on the largest companies.

• Rival mutual fund companies mocked the concept of index funds, believing active management could outperform. Fidelity’s CEO said investors want to earn the highest returns, not average returns.

• Despite the mockery, FIIT was a milestone for Vanguard symbolically as its first fund independently managed without Wellington. But its growth was very slow, reaching only $100 million in assets by 1981.

• FIIT helped Vanguard expand into distribution and marketing of funds. Bogle wanted to shift to a no-load fee structure, without upfront commissions, to boost sales. This reduced costs and Wellington’s control.

In summary, the first index fund was a strategic milestone but initial commercial failure for Vanguard. However, it laid the foundations for future index fund growth.

• Vanguard benefited greatly from the bull market and the rise of 401(k) retirement plans in the 1980s and 1990s. Its assets under management grew rapidly as it positioned itself as a low-cost provider.

• As Vanguard grew, its unique structure allowed it to lower fees and return profits to shareholders. By 2000 its funds had much lower expense ratios than the industry average.

• Founder John Bogle cultivated relationships with journalists, earning Vanguard glowing press for its low costs and transparency. He became known as “Saint Jack,” the moral voice of the industry.

• Vanguard sued a former journalist’s newsletter for using its name in the title, denting Bogle’s image briefly. But overall Vanguard’s growth was remarkable, rising from under 5% of the mutual fund industry in 1980 to over 10% by 2000.

• The Vanguard 500 Index Fund was a huge success, benefiting from lack of competition. It became the largest mutual fund in 2000, surpassing Fidelity’s Magellan Fund. Vanguard’s index funds proved increasingly popular as investors saw their benefits.

• In 1992, Vanguard launched the Vanguard Total Stock Market Index Fund, which aimed to encompass the entire US stock market rather than just the S&P 500. This was considered by some the first true index mutual fund.

• The Total Stock Market Fund was created by George Sauter, who ran Vanguard’s equity funds. He was hired in 1987 and helped improve Vanguard’s index fund tracking and reduce trading costs.

• The 1980s and 1990s saw tremendous growth at Vanguard, which stressed the company’s operations and technology. Vanguard upgraded its systems and moved to a new headquarters in 1993.

• As Vanguard grew, so did Bogle’s ego and confidence. He made bold predictions about reaching $1 trillion in assets and commissioned a large mural depicting a naval battle with Vanguard victorious.

• Bogle mentored a series of young assistants, demanding loyalty but also independence. His former assistants enjoyed annual Christmas dinners where they would poke fun at Bogle.

• In the 1990s, index funds accounted for nearly half of Vanguard’s assets, up from just 11% in 1991. The Total Stock Market Fund quickly became Vanguard’s largest fund.

• John “Jack” Bogle had some amusing quirks and catchphrases known as “Bogleisms” that were poking fun at his management style. Examples include “I need it by 3:00” meaning “I need it by 1:00.”

• Jack Brennan was one of Bogle’s brightest protégés who rose to become president of Vanguard in 1989 and Bogle’s heir apparent.

• Brennan complemented Bogle’s visionary approach with strong management and execution skills. Their competitive natures drove them.

• In 1996, Bogle stepped back as CEO due to heart issues and endorsed Brennan as his successor. However, after recovering Bogle wanted to regain control, leading to clashes with Brennan and the board.

• This mentor-protégé relationship deteriorated badly, with Bogle regretting making Brennan CEO and a bitter boardroom fight ensuing. Brennan became chairman in 1998.

• In 1999, Bogle was forced to retire from the board upon turning 70, despite wanting to stay on. This caused an ugly public spat.

• Bogle never reconciled with Brennan, unlike predecessors he had clashed with, leaving lasting bad blood from the succession struggle.

• Dave Butler was a former basketball player who joined Merrill Lynch on Wall Street in 1991 but was soon disillusioned with the work and culture. He longed to return to California and even considered leaving finance.

• While at Merrill Lynch, Butler realized many in finance didn’t know what they were doing and just generated fees regardless of client interests. He also lost money in the stock market after following faulty advice.

• In 1994, Butler learned of Dimensional Fund Advisors (DFA), a Santa Monica-based asset manager running under $10 billion. He interviewed there while on a trip home and met founder David Booth and Nobel laureate Merton Miller.

• Miller impressed Butler over lunch with theories like efficient markets and diversification. That night, Butler reread his college economics textbooks and resolved to join DFA, realizing it was special.

• DFA was becoming a major force in index investing, nurturing its evolution, despite early bumps like Wells Fargo and Vanguard.

• Booth grew up in rural Kansas but excelled at math. He studied economics at the University of Kansas and became fascinated by the theories of Gene Fama at the University of Chicago.

• After getting his MBA, Booth joined Wells Fargo’s indexing unit in 1971 but left with colleague Rex Sinquefield in 1974 to start Dimensional Fund Advisors.

• David Booth studied economics at the University of Kansas and planned to get a PhD and teach. However, his professor recommended he go to the University of Chicago instead to study under Gene Fama.

• At Chicago, Booth was Fama’s top student. He enjoyed learning about efficient markets and indexing from Fama. However, after getting criticized by Milton Friedman, Booth decided to leave the PhD program after 2 years with an MBA.

• Fama helped Booth get a job at Wells Fargo’s Management Sciences unit, where he worked on an early index fund called Stagecoach Fund. This gave Booth experience with indexing.

• Booth later worked at consultancy AG Becker, where he helped develop index fund software. This led him to identify a market opportunity for a small-cap index fund.

• Booth and colleague Larry Klotz pitched the small-cap index fund idea to pension funds. Though AG Becker declined to pursue it, Booth and Klotz decided to start their own company.

• They brought in Booth’s University of Chicago classmate Rex Sinquefield as a partner. In 1981, the three founded Dimensional Fund Advisors to launch small-cap index funds.

• DFA’s first fund focused on small “microcap” stocks with market values around $100 million. The fund aimed to passively replicate the performance of the entire universe of microcap stocks.

• DFA initially lacked proper office space, operating out of David Booth’s Brooklyn apartment and Rex Sinquefield’s tiny Chicago office next to Grant Park. They worked mostly on the road early on, traveling to meet clients and staying in cheap hotels.

• A key piece of technology was the noisy Quotron machine that provided real-time stock prices. Booth had to build a soundproof room for it in his apartment.

• Despite a bumpy start, DFA’s first fund performed well in 1982 as the stock market rebounded, particularly small caps. This helped generate interest from investors.

• DFA secured some critical early clients like State Farm and Owens-Illinois to get off the ground. Vanguard’s Jack Bogle also provided valuable administrative support in the early years.

• The founders assembled an impressive board of academic advisors including Eugene Fama and Merton Miller to add credibility. Fama signed on as director of research.

• Rex Sinquefield’s wife Jeanne joined to lead DFA’s trading operations, playing a pivotal role in its success. She later gave DFA’s infamous multi-day entrance exam dubbed the “Jeanne Test.”

• In the 1980s, new research started to reveal cracks in the efficient market hypothesis that had dominated academic thinking in previous decades. This research suggested the stock market may not be entirely efficient, and there may be ways to beat it over the long run.

• Stephen Ross and Barr Rosenberg proposed models where stock returns are driven by multiple factors, not just overall market moves. This opened the door to classifying and analyzing stocks based on characteristics like valuation and size.

• Studies in the 1970s-1980s found that value stocks (low price/earnings ratios) and small cap stocks outperformed over time, contradicting efficient market theory. DFA launched funds targeting these factors.

• More recent research has identified momentum as another factor producing market-beating returns. Academics debate whether these “smart beta” factors represent compensation for risk or are driven by irrational human biases.

• The Fama-French three factor model published in 1992 was a major development, identifying market, size, and value factors driving returns. This further legitimized factor investing approaches.

• Overall, the research showed predictable patterns in stock returns and led to the rise of factor investing, breaking from the prior efficient markets consensus. DFA was an early pioneer in putting these academic concepts into practice.

• Eugene Fama and Kenneth French published research in 1992 showing that value and size were enduring factors for excess returns, beyond just market risk (beta). This supported DFA’s approach.

• DFA launched its first value funds in 1992 shortly after this research was published, marking a major expansion beyond just small cap stocks.

• This research allowed DFA to offer a range of equity funds based on factors like value and size, for US and international markets. It was a breakthrough for DFA.

• DFA’s funds were not pure index funds, as there weren’t yet indices for these new factors, but the funds aimed to capture the returns of the factors using rules-based strategies.

• Fees were around 0.3%, in between pure index funds and active funds. This research-based approach appealed to many clients.

• DFA continued growing, though it went through a painful period in the 1980s when small caps underperformed.

• In 1984, Booth and Sinquefield took control by ousting founder Rex Sinquefield in an ugly departure that led to lawsuits.

• By the 1990s, DFA was expanding beyond its small cap roots into a multifactor firm, still grounded in academic research like Fama’s.

• Dan Wheeler’s life was characterized by extremes and constant change, from growing up working-class to becoming a Marine and fighting in Vietnam, working as an accountant and financial controller, and trying to get a PhD before settling down as a stockbroker in Idaho.

• At Merrill Lynch, Wheeler was disillusioned that brokers didn’t know what they were selling and were just churning client money for commissions. Despite Merrill’s analysts, its stock tips seemed bad.

• Wheeler became convinced markets were efficient after studying the work of Fama and others. For his 40th birthday, he quit Merrill to become an independent, fee-only advisor.

• In 1988, he read about Dimensional Fund Advisors in USA Today and reached out, wanting to get his clients into their small-cap fund. DFA was skeptical about taking on “retail” clients but relented.

• Wheeler proposed setting up a DFA unit for fee-only advisors. DFA agreed if he vetted them for commitment to efficient markets. Wheeler organized conferences featuring DFA founders and academics to educate advisors.

• The conferences were a huge success, bringing in billions in assets. Today advisor money is 2/3 of DFA’s $600B AUM. The conferences helped spread efficient market theories among retail advisors.

• So while Wells Fargo developed the first index fund, DFA played a major role in eroding public incredulity about index investing and spreading acceptance of efficient market theories, factor investing.

• Nathan Most, a former physicist and commodity trader, had a visionary idea to create a new financial product that would allow index funds to be traded throughout the day like stocks. He pitched this idea to Vanguard founder Jack Bogle as a way to revive the struggling American Stock Exchange (Amex), where Most worked.

• Bogle rejected the idea, fearing it would turn index funds from long-term investments into short-term speculation vehicles. He felt strongly that index funds should be “buy and never sell.”

• What Most described eventually became exchange-traded funds (ETFs). Bogle admitted later that he completely underestimated how successful and impactful ETFs would become.

• The 1987 stock market crash provided an opening for Most’s idea. The SEC suggested an alternative approach was needed to smooth market volatility. Most and his colleague Steven Bloom saw an opportunity.

• Together, Most and Bloom devised the concept of tradable index fund shares or ETFs. Their boss at Amex, Ivers Riley, recognized their creation could be a “destiny-changing product” to revive the struggling exchange.

• Despite Bogle’s objections, Amex launched the first ETF in 1993 - the SPDR S&P 500 Trust, which tracked the S&P 500 index. It was an immediate success and unleashed the exponential growth of the ETF industry.

• After the 1987 stock market crash, the American Stock Exchange (Amex) was struggling and needed an innovative new product to boost trading activity. Nathan Most, an Amex executive, came up with the idea of creating a tradable instrument that would mimic the performance of the whole stock market.

• The Amex partnered with State Street to develop this new instrument, which became known as the Standard & Poor’s Depositary Receipt or SPDR, nicknamed “Spiders.” It allowed investors to easily trade a bundle of stocks representing the S&P 500 index.

• Spiders took advantage of portfolio trading and mutual funds’ ability to do “in kind” transactions, exchanging shares for the underlying stocks rather than cash. This enabled efficient creation and redemption of Spider shares by market makers.

• Getting regulatory approval from the SEC was challenging, as Spiders didn’t fit neatly into existing categories. Lawyer Kathleen Moriarty had to secure exemptions from the Investment Company Act.

• Despite support from some SEC staff like Howard Kramer, the approval process was lengthy. But ultimately the SEC allowed the listing of Spiders in 1993 as the first exchange-traded fund (ETF), revolutionizing access to index investing.

Here is a summary of the key points and an argument for quick approval of the SPDR ETF:

The SPDR ETF was pioneered by the American Stock Exchange (Amex) and State Street in the late 1980s and early 1990s as a way to allow investors to easily trade the S&P 500 index. It faced many hurdles in getting SEC approval due to its novelty and complexity, with the SEC scrutinizing many aspects of its design and trading mechanics. This regulatory delay allowed Canada to launch the first ETF in 1990 based on Amex’s concept.

After much back-and-forth and complications, SPDR finally launched in 1993 after SEC Chairman Richard Breeden intervened to break the logjam. However, it struggled initially due to lack of support from brokers and advisors who had no incentive to promote it since it didn’t pay commissions. But slowly assets grew, reaching break-even levels by 1993. Trading volumes steadily increased through the 1990s.

By 2013, SPDR had $125 billion in assets and was the most heavily traded stock globally. It launched an entire industry that now has $9 trillion in ETFs and accounts for a third of US exchange volume. The Amex team decided against patenting it, allowing easy copying.

The SEC should move quickly to approve future ETFs to avoid regulatory delays that could allow foreign competitors to move first, as happened with Canada and SPDR. ETFs have proven extremely useful to investors and beneficial for market efficiency and price discovery. Delaying or blocking them harms innovation. Their risks can be addressed through disclosure and oversight rather than outright prevention. SPDR overcame a rocky start to become a great US financial innovation success story. The SEC should enable the next generation of responsible ETF innovation by expediting approval.

• By the summer of 1983, Wells Fargo Investment Advisors (WFIA) was in turmoil. Many of the pioneering figures who launched the first index fund in 1971 had left. Despite its innovations, WFIA was losing money due to low fees and high research costs.

• The stock market crash of 1982 caused heavy outflows from WFIA’s funds. Morale was low and more key personnel departed, leaving WFIA understaffed.

• In desperation, WFIA rehired Frederick Grauer, an academic who had briefly worked there before. Grauer stabilized WFIA, negotiating a new structure giving it more autonomy within Wells Fargo.

• By the mid-1980s, with the stock market recovering, assets started flowing back into WFIA’s index funds. In 1988 WFIA turned its first ever profit of $13.5 million, compared to years of losses previously.

• Grauer transformed WFIA from a floundering research unit into a highly profitable asset management firm, laying the foundations for its future growth into a global investment empire.

• Fred Grauer transformed Wells Fargo Investment Advisors (WFIA) from an academic research unit into a commercially successful index fund manager. He instilled a stronger profit focus but maintained a gentler culture than typical in finance.

• Grauer expanded WFIA globally, doing a joint venture with Nikko Securities in Japan in 1989. He then sold the company to Barclays in 1995, breaking into the UK market.

• Grauer abruptly resigned in 1998 after Barclays refused his demand for a pay raise. His protégé Patricia Dunn took over leadership.

• Dunn had an incredible rags-to-riches story, rising from temporary secretary to CEO. She was a gifted leader beloved by employees for her people skills.

• Under Dunn’s leadership, Barclays Global Investors (BGI) continued expanding rapidly in index funds and quantitative strategies globally. But it soon faced growing competition from Vanguard and others.

• Easing commercial pressures - Index funds had become commoditized, with fees falling due to competition. This squeezed revenues for companies like BGI.

• BGI’s core quantitative strategies were being copied by rivals, driving up salaries for quant talent. This impacted BGI’s bottom line growth.

• In the 1990s, Morgan Stanley became interested in listed index funds and partnered with BGI to launch WEBS (World Equity Benchmark Shares) in 1996. But WEBS were initially a dud.

• In 1998, Patricia Dunn became CEO of BGI after Grauer’s exit. She saw potential in ETFs and tasked Lee Kranefuss with expanding the business.

• Barclays provided $40 million over 3 years to build up the ETF business, despite skepticism internally at BGI. Many saw ETFs as a distraction from BGI’s core institutional index fund business.

• In 2000, WEBS was rebranded as iShares. Kranefuss built it up as a separate brand within BGI, with an entrepreneurial culture. He launched many new ETFs tracking various indices.

• BGI sponsored marketing campaigns to promote iShares to retail investors. Some at BGI resented the cost and impact on bonuses. But the efforts helped grow the ETF business rapidly.

• In April 2009, during the financial crisis, BlackRock was looking to acquire Barclays Global Investors (BGI), the asset management arm of Barclays.

• BGI’s fast-growing iShares ETF business had agreed to be sold to private equity firm CVC for $4.2 billion. But this deal included a “go-shop” provision allowing Barclays to talk to other potential buyers.

• BlackRock president Rob Kapito secretly met Barclays CEO Bob Diamond at a Yankees game to propose BlackRock buying all of BGI, not just iShares. This would give Barclays cash and a stake in the combined BlackRock-BGI giant.

• Diamond agreed to visit BlackRock CEO Larry Fink the next day to discuss. A deal would make BlackRock the undisputed titan of asset management with over $2.7 trillion under management.

• But it was risky as the financial industry was in crisis, and merging the aggressive Wall Street culture of BlackRock with the more passive, analytical BGI could prove difficult.

• The deal would also shift passive indexing into the mainstream and potentially reshape the asset management landscape.

• Larry Fink grew up in a middle-class family in Los Angeles and studied political science at UCLA before switching to business. He started his career at First Boston in the 1970s and quickly rose to head its mortgage bond trading desk, making the firm an estimated $1 billion.

• In 1986, Fink’s trading desk lost about $100 million due to a failed hedging strategy when interest rates unexpectedly fell. This failure ended his trajectory to become CEO at First Boston.

• In 1988, Fink left First Boston and teamed up with Ralph Schlosstein from Lehman to start a new firm focused on mortgage bond analytics and portfolio risk management.

• Fink and Schlosstein each contributed several key partners from their respective firms to the new venture, which became BlackRock. They agreed to split ownership 60/40 between them.

• Blackstone provided $5 million in seed funding for BlackRock in exchange for 50% ownership initially. The firm was housed in Blackstone’s offices.

• BlackRock aimed to leverage technology and improved risk management to become a leader in analyzing and managing fixed income portfolios. Fink’s earlier trading debacle informed the focus on risk management.

• Larry Fink, Ralph Schlosstein, and others founded Blackstone Financial Management as part of Blackstone Group in 1988. They started with little asset management experience but strong connections.

• BFM grew quickly, managing $23 billion within 6 years. But there was tension with Blackstone over equity dilution as BFM took on more partners.

• In 1994, BFM bought itself out from Blackstone for $240 million and became BlackRock. It went public in 1999, though the IPO was disappointing.

• As a public company, BlackRock started growing through acquisitions. It considered buying Barclays Global Investors in 2004 but didn’t go through with it.

• Instead, its first major acquisition was State Street Research in 2004 for $375 million, giving it equity and real estate capabilities beyond bonds.

• After acquiring State Street Research and Merrill Lynch Investment Managers, BlackRock’s next big acquisition was Barclays Global Investors (BGI) in 2009. This was a complex and challenging integration, but cemented BlackRock’s position as the world’s largest asset manager.

• The BGI deal came about after Barclays looked to sell the business during the financial crisis. BlackRock moved swiftly and aggressively to acquire BGI in a stock transaction that valued BGI at $13.5 billion.

• Integrating BGI was difficult due to cultural differences and BGI executives initially doubting BlackRock’s abilities. BlackRock moved decisively to impose one culture and used Aladdin as the technological backbone.

• Key BlackRock founders like Sue Wagner, Ralph Schlosstein and Keith Anderson had left by this point. The loss of Schlosstein in particular was hard for Larry Fink.

• BlackRock navigated the 2008 financial crisis well compared to competitors, thanks to its Solutions advisory business analyzing complex securities. This raised its profile and positioned it for the BGI deal.

• After initially downplaying the crisis, BlackRock and Larry Fink became influential advisors to the U.S. government and Wall Street on dealing with toxic assets and securities. This further bolstered Fink’s stature.

• Acquiring and integrating BGI successfully cemented BlackRock’s status as the world’s largest and most influential asset manager under Fink’s leadership. Despite challenges, it was a transformative deal for the company.

• Charles Wiedman, a former Treasury executive, was brought in by Larry Fink to lead the integration of BlackRock’s acquisition of Barclays Global Investors (BGI).

• The deal was very complex - it doubled the size of BlackRock but quadrupled its complexity. It also combined two very different cultures - BlackRock’s Wall Street mentality versus BGI’s more academic approach.

• Many BGI employees were unhappy about the deal and saw the two firms as incompatible. BGI executives felt superior to BlackRock.

• The deal almost collapsed at the last minute when Qatar pulled out of financing. Fink worked furiously to find alternate financing.

• Wiedman was paired with BGI’s Manish Mehta to lead the integration. They developed a close working relationship despite their cultural differences.

• Integrating the two very different cultures and retaining BGI talent during the integration would prove challenging.

• The integration of BGI into BlackRock was challenging, as many BGI executives clashed with BlackRock leadership, especially Rob Kapito. Kapito was seen as aggressive and abrasive by some BGI people.

• BGI’s godfather Fred Grauer tried to ease the transition by being hired back as an advisor, but was sidelined after raising concerns about Kapito to Larry Fink. This showed Fink’s loyalty to Kapito over outsiders.

• Mark Wiedman led the integration efforts and is credited with making it largely successful, aided by Charlie Hallac. But it took about 3 years for full integration.

• There were more client overlaps than expected, leading BlackRock to lose some mandates. Physical distance between New York and San Francisco offices also complicated things.

• BGI’s San Francisco office lost autonomy and leadership was moved to New York. But allowing regional cultural differences helped smooth things.

• On the day the deal closed, BGI’s name and branding was immediately changed to BlackRock, which upset some BGI staff.

• Significant BGI executive turnover followed, estimated at 50-75%. Fink sees this as necessary to enforce one corporate identity.

• The deal proved very successful for BlackRock, with iShares becoming hugely valuable. But integration was messy and difficult culturally.

• Robert Netzly discovered the concept of “biblically responsible investing” while working at Wells Fargo, which avoids investing in companies that profit from things like abortion, pornography, or LGBT rights.

• As a devout Christian, Netzly was disturbed to find he owned stocks of pharmaceutical companies that provided abortion drugs. He felt he could not in good conscience continue advising clients to invest in such “unholy” companies.

• In 2015, Netzly founded Christian Wealth Management, advising clients on investing entirely according to Christian principles. But he struggled because many clients wanted low-cost index funds, which invested broadly.

• Mainstream index providers refused to create bespoke products screening out “sinful” sectors. So in 2015, Netzly founded Inspire Investing to launch “biblically responsible” ETFs that avoided companies not adhering to conservative Christian values.

• Inspire uses a grading system to identify and exclude companies involved in areas like abortion, pornography, LGBT rights, etc. This allows devout Christians to invest in low-cost index funds aligned with their values.

• The growth of biblically responsible ETFs reflects how the democratization of indexing allows niche customization for specific groups like conservative Christians. But it also raises concerns about intolerance and discrimination.

• Inspire Investing launched a series of “Bible-based” ETFs that exclude companies deemed objectionable based on biblical principles. This caused controversy, but has been a success with over $1.3 billion in assets.

• The ETF industry has exploded in variety and number of products. In 2000 there were just 88 ETFs managing $70 billion. By 2020 there were nearly 7,000 ETFs globally managing $7.7 trillion.

• Many new ETFs are highly specialized or niche, leading to criticism that the industry is creating too many speculative products. Some compare it to the mutual fund boom of the 1980s that ended badly.

• The proliferation of ETFs has led to an explosion in the number of financial indices, with around 3 million “live” indices now versus only 41,000 public companies globally.

• The growth creates risks of investors making poor choices, but proponents argue the market should decide. Some products languish while others like cybersecurity take off serendipitously.

• The variety of choice allows customization but risks overcomplication. The growth of ETFs and indices appears endless, raising questions as to whether an “optimal allocation” exists.

• The explosion of niche index funds and ETFs reflects a worrying trend back towards the kind of speculative investing that index funds were originally designed to avoid.

• There is little meaningful difference between betting on a hot stock and a niche ETF in a trendy sector. This blurs the line between “active” and “passive” investing.

• The construction of indices involves many active choices, often by opaque committees rather than transparent fund managers. This reduces transparency.

• New “semi-transparent” active ETFs allow fund managers to conceal their holdings, reducing transparency further. It remains to be seen if these will be popular.

• Derivatives-based ETFs have proliferated, allowing speculative bets on market volatility. Some blew up dramatically in 2018 and 2020, causing broader market turmoil. This highlights their risks and complexities.

• Major ETF providers have avoided these more complex products, concerned about potential damage to ETFs’ image. But their assets continue to grow rapidly.

• The launch bonanza is slowing as the industry matures and big players dominate. But product innovation will continue, raising concerns about blurring lines between active and passive investing. More complexity and less transparency threaten to undermine key benefits of index funds.

The major index providers like S&P Dow Jones Indices exert significant influence over financial markets due to the growth of index funds. Trillions of dollars now track major stock and bond indices, meaning inclusion in or exclusion from an index can dramatically impact a company’s stock price and valuation. Tesla’s addition to the S&P 500 in late 2020 caused its stock to surge as index funds had to buy tens of billions of dollars worth of shares. Smaller companies can see even more dramatic swings based on index decisions.

While indices are often seen as purely objective market snapshots, the reality is more complex. Deciding the criteria for inclusion, weighting, and other methodology involves judgment calls by the index providers. This gives them quiet but substantial power over markets and companies. The index industry has consolidated into a “Big Three” of MSCI, FTSE Russell, and S&P Dow Jones Indices, which control around 70% of the market. Creating benchmarks has become a highly profitable business.

The rise of passive investing means index providers now play a bigger role than ever in steering huge amounts of capital. Even active managers are constrained by benchmark performance. So indices shape markets rather than just reflecting them. The index fund revolution has been hugely beneficial for the previously obscure index industry in terms of revenues and influence.

• Index providers like S&P Dow Jones, MSCI, and FTSE Russell exert significant influence over markets through their design of stock and bond indices that passive funds track.

• Index inclusion/exclusion decisions, classification of companies into sectors, and country classifications like “developed” vs “emerging” have major impacts on capital flows.

• Index providers make judgment calls and set standards that shape corporate governance, like S&P Dow Jones’ rule on dual-class shares.

• Countries lobby intensely to get their markets included or avoid exclusion from major indices due to the implications for investment flows.

• China pressured MSCI to include its stocks in emerging market indices. The US opposed this due to issues like Chinese surveillance companies being included.

• Bond indices weight countries by debt amounts, so more indebted countries have higher weightings, creating potentially risky incentives.

• Index providers have gained “private authority” over capital allocation and regulations, raising concerns about transparency and accountability.

• Index funds and ETFs can sometimes cause unexpected market movements due to the mechanics of how they operate. Examples include the VanEck Vectors Junior Gold Miners ETF causing drops in small gold mining stocks when it had to change its index, and the SPDR S&P Dividend ETF’s large ownership stakes in struggling companies Tanger and Meredith leading to volatility when they were removed from the fund’s index.

• These incidents illustrate how the growing influence of passive funds can distort markets in subtle ways. The benefits to investors are clear, but some skeptics argue the costs to overall market health are increasing.

• Passive investing is becoming such a dominant force that it’s shaping markets akin to how water shapes and sustains fish, yet its impact often goes unnoticed or unquestioned. The analogy comes from David Foster Wallace’s famous commencement speech about the hardest realities to see being the most obvious and pervasive ones.

In summary, the proliferation of index funds and ETFs is transforming markets in profound ways, both directly through their trading and indirectly by their benchmarking role, but this growing influence is an “obvious reality” that largely goes unseen, like water to fish. More scrutiny of their impact is needed.

Here are the key points about the impact of passive investing on markets:

• Passive index funds put most of their money into the biggest stocks or debtors, which can disproportionately benefit those securities and contribute to market bubbles.

• The “outperformance” of index funds compared to active managers may be partly a self-fulfilling prophecy, as index funds benefit from continual inflows in proportion to their existing holdings.

• Index funds invest nearly all money into the market, unlike active managers who hold some cash. This may increase overall market valuations.

• Index funds now own a large portion of the stock market, reducing the pool of shares freely available to trade. This can amplify price increases when money flows in, and crashes when it flows out.

• Some studies show index funds cause securities to move more in lockstep rather than on their own fundamentals, and increase volatility in stocks they heavily own.

• Critics argue index funds are affecting the functioning of markets themselves. The risks may be most acute in less liquid markets like bonds.

• Carl Icahn and Larry Fink had a public clash over bond ETFs at a conference, with Icahn predicting problems in the bond market and Fink defending bond ETFs.

• Some critics worry there is a “liquidity mismatch” in bond ETFs - the ETFs trade frequently but some of the underlying bonds trade infrequently, so the ETF may not be able to sell bonds easily to meet redemptions.

• This concern arose during the March 2020 market turmoil, as discounts opened up between ETF prices and net asset value. However, the ETF structure held up well and the discounts reflected true dysfunction in the bond market.

• Despite predictions, money has remained “sticky” in index funds during downturns, suggesting they may be more stable than active funds.

• Index funds are disrupting the investment industry, as even active funds with good performance are being replaced by quantitative and passive approaches, as seen by an example of a UK pension fund shutting its active equity team.

• Research by William Sharpe and others has mathematically shown active management to be a “loser’s game” after costs compared to passive indexing.

• William Sharpe showed in his 1991 paper that on average, passive index funds outperform active funds due to their lower fees. Other academics like Lasse Pedersen have argued active funds can theoretically add value overall, but it is an empirical question whether they do in practice.

• Research shows most top performing active funds fail to remain at the top over 5+ years. As a result, investors are increasingly demanding, and even top performers face outflows.

• Some argue the rise of passive investing leads to inefficient capital allocation, as money flows blindly to past winners rather than considering future prospects. But others counter that markets are actually becoming more efficient as mediocre active managers exit the industry.

• There is an inherent paradox - markets need information to be efficient, but no one is incentivized to produce information if markets are perfectly efficient. However, the cold reality is passive funds have lower fees and outperform over time.

• The hope is passive funds reach a tipping point where there are so many inefficiencies that active managers have an advantage. But so far there is little evidence this is occurring. Rather, remaining active managers are more skillful as weaker ones exit the industry.

• Index funds like BlackRock and Vanguard are becoming the largest owners of public companies due to the growth of passive investing. This gives them significant power and influence over corporate governance.

• The Parkland school shooting tragedy highlighted this issue. As major owners of gun manufacturers, activists called on BlackRock and Vanguard to influence these companies, but they are limited in what they can do since the stocks are in their index funds.

• Critics are increasingly focused not on whether index funds distort markets, but on their impact on corporate governance and growing industry concentration.

• Jack Bogle himself warned about the oligopolistic structure emerging, with just a handful of firms controlling voting rights over most large US companies.

• Hedge fund Elliott Management’s Paul Singer raised concerns that index funds have little incentive to be active owners, leading to worse corporate governance.

• Solutions proposed include index funds being more active stewards, divesting stakes, or limiting ownership concentration. But inherent constraints exist due to passive indexing model.

• The debate on index funds’ corporate governance role will likely intensify as their dominance continues growing.

• Hedge fund billionaire Paul Singer criticized the rise of passive investing and index funds in a 2017 letter, arguing they lead to lazy, inattentive ownership and declining corporate accountability.

• Many investment groups outsource corporate governance work to proxy advisors like Glass Lewis and ISS, who advise on shareholder votes. This allows passive funds to avoid the hassle, but is seen by some as an abdication of responsibility.

• In response to criticism, major index funds like BlackRock, Vanguard, and State Street have expanded their stewardship teams to more actively engage with and monitor the companies they invest in, especially on ESG (environmental, social, governance) issues.

• BlackRock’s Larry Fink wrote a 2020 letter requiring companies to improve sustainability reporting and practices or risk voting action, sparking criticism that index funds are overstepping into political territory.

• The growth of passive investing presents challenges in balancing passive ownership with active engagement, especially amid rising polarization. Index funds must navigate presssure from both sides - doing too much or too little.

• Larry Fink, CEO of BlackRock, has come under criticism from both the left and right for the firm’s stances on climate change and other ESG issues. Conservatives argue BlackRock is pursuing a political agenda while some on the left say it’s not doing enough on climate.

• The “common ownership” theory suggests that high levels of overlapping ownership by large index funds like BlackRock, Vanguard, and State Street may dampen competition between companies. The theory has gained some traction among regulators but is still debated.

• The enormous size and concentrated power of the major index fund firms raises broader concerns about their influence over corporations and the economy. Their trillion-dollar scale gives them unparalleled voting power and economic control.

• Index funds’ structural incentives promote ever-increasing concentration of power in just a handful of huge investment managers like BlackRock, Vanguard, and State Street. This poses potential issues around accountability and legitimacy.

In summary, the rise of quasi-monopolistic index fund giants has sparked intense debate around their impact on corporate governance, competition, and the overall economy. Their unprecedented scale and reach raises complex questions without easy answers.

Here is a summary of the key points made by bchuk and Boston University’s Scott Hirst:

• If current trends continue, the “Big Three” asset managers (BlackRock, Vanguard, State Street) will control over a third of all voting shareholders in the largest U.S. companies within the next decade.

• Within the next 20 years, they estimate the Big Three will control around 41% of shareholder voting power in major U.S. companies without a controlling shareholder.

• This would lead to a “Giant Three” scenario where these three investment managers largely dominate shareholder voting across most big U.S. companies.

• BlackRock’s Larry Fink argues this concern is overblown, as asset management remains less concentrated than other industries.

• If concentration does become an issue, Fink says holdings could be divided into separate smaller entities to decentralize control. This would be complicated but feasible.

• However, the increasing concentration of corporate ownership is a key issue that worried Vanguard’s founder Jack Bogle in his final days.

• The challenge is balancing the benefits index funds provide to investors versus potential downsides of size and concentrated power.

Here is a summary of the key points about Louis Bachelier and the early pioneers of the efficient market hypothesis:

• Louis Bachelier was a French mathematician who in 1900 published a thesis on the theory of speculation, which was the first work to model stock market prices as following a random walk. This laid the foundations for the efficient market hypothesis.

• Bachelier’s work was very advanced for its time and largely ignored initially. It was later rediscovered in the 1950s and recognized as groundbreaking.

• In the 1930s, Alfred Cowles conducted research showing that professional stock market forecasters were unable to outperform the market consistently. This provided empirical evidence for market efficiency.

• Cowles later helped found the Cowles Commission, which promoted mathematical and statistical modeling in economics. Several pioneers of the efficient market hypothesis were associated with the Cowles Commission.

• Other early proponents of the efficient market hypothesis included Holbrook Working, Maurice Kendall, and Paul Samuelson. They expanded on Bachelier’s random walk idea and tied it to the concept of informational efficiency.

• Empirical analysis and modeling advanced significantly in the 1950s and 1960s, laying the groundwork for Eugene Fama’s seminal 1970 paper that defined the efficient market hypothesis and synthesized the previous research.

Here is a summary of the key points from the excerpt of Peter Bernstein’s Capital Ideas:

• In the late 1960s, a few pioneering thinkers began developing new financial theories and models that would transform Wall Street.

• Harry Markowitz developed modern portfolio theory, which mathematically balances risk and return in constructing optimal portfolios. This was a revolutionary concept compared to the previous focus on picking individual stocks.

• Eugene Fama advanced the efficient market hypothesis, which claims stock prices fully reflect all available information, making it impossible to beat the market consistently.

• At Wells Fargo, John McQuown and his quant team built on these theories to develop sophisticated quantitative techniques for portfolio management.

• Other pioneers like Dean LeBaron, Rex Sinquefield, and Bill Fouse promoted indexing and quantitative investing despite resistance from traditionalists.

• By the 1970s, these innovations challenged the foundations of active stockpicking, paving the way for index funds and the quant revolution on Wall Street. Though initially viewed as heretical, these ideas gained acceptance and now dominate modern investment practices.

Here is a summary of the key points from Chapters 6-11:

Chapter 6:

• Details the early life and career of Jack Bogle, founder of Vanguard. He started the first index mutual fund in the 1970s.

Chapter 7:

• Discusses Bogle’s creation of the first index fund, initially mocked as “Bogle’s Folly.” It grew slowly at first but proved to be a major innovation.

Chapter 8:

• The index fund gained acceptance and assets rapidly starting in the 1990s. Vanguard became a huge success.

Chapter 9:

• Dimensional Fund Advisors pioneered “factor investing” based on academic research about market anomalies.

Chapter 10:

• DFA further developed factor investing strategies based on various attributes like size and valuation.

Chapter 11:

• Covers the origins of the first exchange-traded fund (ETF), launched by Nate Most in the 1990s. ETFs made index investing more accessible.

Here is a summary of the key points from the chapters referenced:

• The rise of index funds and ETFs has shifted power in financial markets from active stock pickers to passive asset managers like Vanguard and BlackRock.

• John Bogle pioneered index funds at Vanguard in the 1970s. Critics doubted they could succeed but they now manage trillions in assets.

• Nate Most created the first ETFs in the 1990s, allowing intraday trading of index funds. Usage exploded after the tech bubble as investors sought simpler approaches.

• Barclays Global Investors led the ETF industry in the 1990s and 2000s under CEO Lee Kranefuss. It popularized ETFs beyond stocks into bonds and gold.

• Larry Fink gambled by buying BGI in 2009 when few wanted it, creating BlackRock. It’s now the world’s largest asset manager at $7 trillion.

• Index providers like MSCI and S&P wield immense influence over global markets by determining membership in key benchmarks.

• Passive investing’s growth raises concerns about market stability, corporate governance, and concentration of power.

Can I provide a brief summary of the key points about John Bogle? Here are some main points about John Bogle:

• He was the founder of Vanguard Group and pioneered index investing. He established the first index mutual fund in 1976.

• Bogle believed in a passive, long-term investing approach focused on keeping costs low and diversifying broadly. This became known as the Bogleheads investment philosophy.

• He wrote several influential books advocating index funds, including The Little Book of Common Sense Investing.

• He popularized the idea that most active managers fail to beat market indexes over the long run, so passive index funds tend to outperform active funds after fees.

• Bogle passed away in 2019 at age 89, leaving behind a legacy of making investing simpler and more accessible for regular investors through index funds. He is credited with fundamentally changing investing practices.

• Towards the end of his life, Bogle warned about index funds becoming too influential and dominating voting shares of corporations. But he continued to believe in the value they offer to investors.

• Bogle was critical of Wall Street excess and high fees charged by the financial industry. He focused Vanguard on keeping costs ultra low for investors.

Does this help summarize some of the key points about John Bogle and his significance? Let me know if you need any clarification or would like me to expand on any part.

Here is a summary of the key points about Jack Bogle from the passage:

• Background: Grew up in New Jersey during the Great Depression. Attended Princeton University on a scholarship. Started career on Wall Street in 1951.

• Founded Vanguard: Launched the first index mutual fund in 1976 as head of Vanguard, which he founded. Believed in low fees and index investing. Grew Vanguard into one of largest fund companies.

• Index investing pioneer: Credited with popularizing index funds and passive investing. Authored books advocating index funds and criticizing active management. Called “Saint Jack” for championing individual investors.

• Personality/leadership: Hard-driving, tenacious, passionate about index investing. Had disputes with Vanguard executives leading to schism. Known for his “Bogleisms” and witty dinner speeches.

• Later years: Stepped down from Vanguard leadership in 1990s. Continued speaking and writing in retirement. Died in 2019 at age 89, hailed as a visionary who revolutionized investing.

• Harvard Business School, Harvard Law School, and Harvard University are mentioned as prominent institutions.

• The hedge fund betting story involves Warren Buffett, Ted Seides, and Protégé Partners. It was a 10-year bet on index funds vs. hedge funds started in 2008.

• Pioneers in index funds and efficient markets include Burton Malkiel, John Bogle, the “Quantifiers,” Eugene Fama, and others.

• Vanguard played a major role in popularizing index funds, started by John Bogle in the 1970s.

• BlackRock grew to become a huge asset management firm, acquiring Barclays Global Investors and its index funds/ETFs in 2009.

• The development of indexes like the S&P 500, Russell 2000, and others facilitated index investing. MSCI indexes and index changes are also discussed.

• Issues like passive investing, inequality, proxy voting, and inclusion in indexes are debated.

Here is a summary of the key points about index funds and indexing from the passages:

• S&P indices like the S&P 500 and S&P High Yield Dividend Aristocrats Index are referenced as popular benchmark indices that index funds aim to track.

• The S&P 500 index has a history going back to 1929 and its inception reflected a shift towards indexing stocks based on market capitalization.

• SPDRs (Standard & Poor’s Depositary Receipts) are one of the early and popular ETFs tracking the S&P 500.

• Vanguard launched some of the first index mutual funds tracking the S&P 500 like Vanguard First Index Investment Trust and Vanguard 500 Index Fund.

• Other key players in the history of index funds and indexing include Wells Fargo, American National Bank, Dimensional Fund Advisors, and BlackRock.

• Indexing pioneers like Jack Bogle, Rex Sinquefield, and Eugene Fama helped drive adoption of index funds and scientific approaches to indexing.

• Passive index investing gained prominence over active stock picking, supported by academic research like Sharpe’s work on capital asset pricing.

Here is a summary of the key points from the book:

• The book traces the history of index funds and index investing, starting with the first index mutual fund created by John Bogle at Vanguard in the 1970s.

• It discusses how academics like Paul Samuelson, Harry Markowitz, and Eugene Fama developed theories like the efficient market hypothesis that supported index investing.

• Key figures like Rex Sinquefield, David Booth, and Jack Bogle evangelized index funds despite skepticism from the finance industry.

• Major events like the 1987 stock market crash demonstrated the value of index funds over actively managed funds.

• The creation of the first ETFs like SPY in the 1990s allowed index investing to expand beyond mutual funds.

• Firms like BlackRock used acquisitions and mergers to become giants of index fund management.

• Today, index funds and ETFs manage trillions in assets and some argue they have too much influence over the stock market.

In summary, the book chronicles the growth of index funds and index investing from a fringe idea in the 1970s to a dominant force in finance today. Key innovations and evangelists overcame initial skepticism and fundamentally changed how individuals and institutions invest.

Here is a summary of the key points from chapter 17:

• Passive investing through index funds has grown enormously in popularity, with over $2 trillion flowing out of actively managed mutual funds since 2007.

• Index funds like those tracking the S&P 500 have consistently outperformed the majority of actively managed funds over the long term.

• Even legendary investors like Warren Buffett have struggled to beat passive index funds in recent years.

• Active managers argue they can outperform in bear markets by being nimble, but data shows most still underperform indices even in downturns.

• The shift to passive investing accelerates after each market crash as investors lose faith in active managers’ ability to outperform.

• Over longer time horizons like 10 years, only about 15% of active US stock fund managers have managed to outperform their benchmark index.

• Passive investing may be less efficient in more exotic asset classes like emerging markets, but overall the data shows most active managers underperform over time after fees.