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think that index investing if everybody did it won't work but for another considerable period index investing is going to work better than active stock picking where you try and know a lot demonstrate so dramatically I've talked to huge pension funds and I've taken them through the math and when I believe they go out and hire a bunch of consultants and pay them a lot of money.
And I it just unbelievable. And the consultants always change the recommendations a little bit from year to year. They can't change them 100% because then it didn't look like they knew what they were doing the year before. So they tweak them from year to year and they come in and they have lots of charts and PowerPoint presentations and they recommend people who in turn are going to char charge them a lot of money and they say well you can only get the best talent by paying two and 20 or something of sort and the flow of money from the hyperactive to what I call the helpers is dramatic while this group over here sits here and absolutely gets the record of American industry.
So I hope you'll realize that for most for the population as a whole, American business has done wonderfully and the net result of hiring professional management, you know, is a huge minus. And at the bookstore, we have a little book called Where are the customer shots? Written by Fred Schweit. I read it when I was about 10 years old.
been updated a it hadn't been updated but new additions have been put out a few times but the basic lessons are there that lesson is told in that book from 1940. It's so obvious and yet all the commercial push is behind telling you that you got to think about doing something today that's different than you did yesterday.
You don't have to do that. You just have to sit back and let American industry do its job for you. Charlie, do you have anything? Well, I wrote a memo about six or seven years ago entitled investing without people and I talked about uh index and passive systematic and algorithmic AI and machine learning and you know when I went to Chicago uh u the professor told us that the statistics showed that most mutual equity mutual funds did not equal the S&P before fees and the vast majority lagged after fees.
He says, "Why don't they just buy one share of every stock in the S&P? There was no such thing as index funds at that time uh or indexation." Uh and of course, Jack Bogle popularized it in ' 74. And now I believe that passive and index investing accounts for the majority of mutual fund equity capital, not because uh passive results are so good, but because asset active was so bad.
Uh, and so, you know, it if you go back to when we started, you could go into this business, you could hang up your signal, you could manage equity money, you could lag the S&P, and you could charge a high fee. The world's a smarter place now, and you can't do that. And that's why the money has flowed into uh passive funds.
And um uh by definition on average most people do average and most people don't beat the average which means they don't deserve high fees before fees and they fall further behind after fees. So that was a flawed business model which is in the process of being corrected and that's why a lot of money has been turned over to let's say machines something mechanical and um I I still believe that there are people who have superior insight and see things better and you know the future is not a fact.
The future does not yet exist and we can sit here today and predict it. the future will develop and there are people small minority who see the future better than others and who understand the shape of the probability distribution and whether the expected return compensates for the pitfalls that lurk in the lefth hand tail.
Those people deserve to do very well. The rest do not. And um as to your last question, a lot of people have made a lot of money working in the investment management business without adding much value. Uh and and and it because their efforts have been unsuccessful, but they've been highly paid for it.
That's the reason for the passive and index investment movement. And it it you know it was just people were just starting to theorize about it when I was in graduate school. And then in 1974 Vanguard and Jack Bogle invented the first index fund and now it it it accounts for a reasonable amount of capital.
So yes over the years people have have invested unsuccessfully and been highly paid for that which if you think about it should not be a formula for the for success. And so the success for those people and there are lots of them is ending and a lot of money is flowing from uh active to passive investing uh and it's important to realize not because the results of passive investing are so good but because the results of active investing are so bad.
That's number one. So as a result I wrote a memo and I say that about most things uh a year ago last June entitled investing without people and there are movements like indexation and passive investing and algorithmic investing systematic and eventually AI and machine learning where uh processes or computers will replace people because at least they won't make the emotional mistakes And so I think that over time we will see uh AI uh coming into use and um and a lot of people will be out of work.
You may have asked facitiously but I think it's going to be true. Uh or at least investing will stop being one of the highest paid jobs in the world for large numbers of people. I still believe that there will be a place for exceptional people because I think that the computer, you know, as I say in the memo, I don't think a computer can sit down with with with somebody and figure out whether or not he's Steve Jobs.
I don't think that a computer can look at five business plans from Silicon Valley and know which one is eBay or Amazon. So I think that exceptional people who can make exceptional judgments will still be helpful to investors. Uh but not clearly everyone everyone's opinion on average is worth about average.
So I hope that answers it. And and and by the way so you can read that memo on online at oakrecap.com. They're all there and they're all free so the price is right and and uh and and I hope you will when I went to we didn't talk about this too much at at Wharton but when I went to Chicago they had done a lot of research which showed that the average mutual fund had done worse than you would have made would have done if you just bought the S&P or the Dow or something like that.
So some people started saying radical things like well why don't they just buy one share of every stock in the index and there was no word for it in those days but that turned into what we call passive investing or or or or and and it it led to the creation of index funds. The first prominent one of which was the Vanguard 500 index fund in 1975 as I recall.
So, um, you know, uh, as I mentioned before, most active managers have not done as well as the index. And by the way, it doesn't it stand to reason to think that on average, everybody's going to do average before fees and below average after fees. So, it's only the exceptional people who can beat the index after fees.
Not everybody, not the average person, but the exceptional. Further, we talked earlier about the emotional challenges of being a contrarian and adding value. And most people aren't uh in control of their emotions. Most people are by definition not contrarian. So, there's been a strong movement toward uh index investing.
You know, it used to be something of a novelty uh back in 1975 or even 85 and today it's it's a real thing and lots of people are replacing their their active managers with with uh passive uh largely because the activives didn't didn't do any good and but as you point out uh Jason in in passive uh people just buy the same stocks in the index in the same waiting as the index.
Now the irony of this I want to before I move on to your real question I just want to point out what I think is a supreme irony of this which is why do the stocks in the index have the waiting in the index that they have? Where do these indices weightings come from? They don't come from up there. They don't come from the operation of nature or physics.
This stock has a has a value of $80 billion. That company has a value of $180 billion. Why? Partially because what the companies accomplish and partially accomp because of what the investors say they're worth. So the the the the market weightings, the prices and thus the waitings are assigned by whom?
By active investors. And yet there's a trend to passive investment on the premise that the active investors don't really know what they're talking about. And yet the the the the the mo of the passive investor is to emulate the decisions made by the active investors who they think are idiots. So it it doesn't make any sense anyway that that's what that's what passive is doing today.
And we have to wonder about the wisdom of passive investing. And you know, so one of my clients called up and said that that she has a new treasurer and the new treasurer wants to put all the the whole portfolio into an index fund. All the stock, fire this manager and that manager, that manager, not not us.
We don't manage equities, but put all the money into an index fund. What do what do I think? What should she say to our treasurer? I said, "Ask him how he feels about having all his money invested in funds where nobody is thinking about which stocks should be included or what they're worth or how they should be weighted." Anyway, so that's I think that's a very extreme thing.
It used to be that the active managers did all the work of studying companies and figure out the prices and the waitings and all that stuff. And so the if a few people came along and wanted to kind of free ride passively on their efforts, they could just emulate their decisions and not pay the research bill.
That was a good strategy. But what happens when most of the people are free riding? Who do they free ride off of? That's that's the question that I I think you'll enjoy thinking
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