Trillions, by Robin Wigglesworth

Trillions by Robin Wrigglesworth

I absolutely loved this book. There is an exciting genre of books on financial shenanigans, at the epoch is probably the likes of Michael Lewis, but there is a whole host of others and Wrigglesworth books on Index Funds is up there with them. The pen portraits of the characters involved, along with the high drama and betrayals of those involved in the creation of this new industry make the book a joy to read. That it also educates as it goes in the cherry on the top. There is almost no more boring phrase in the English lexico

n than ‘Index Fund’ but it turns out it has shaped our world for the last fifty years and is set to have hugely (potentially damaging) impacts in the future.

Beneath my own summarising notes I’ll include the passages I highlighted from my Kindle edition, at something 1.5% of the book this should not infringe on any copyright.

Essentially picking the stocks that went into mutual funds was an exciting and big business in the 1950s and 60s. They followed a sort of ‘great man’ theory where individual geniuses would someone have a sense of where stocks were going and be able to predict the market. The rewards for doing so were large and those at the top of the game were celebrities within the industry.

However, as this book shows during this same period more and more financial research was proving that the returns that

most stock pickers could boast – were more often than not beneath the average increase of the market as a whole. Many began pushing for the creation of algorithms that could accurately track a collection of the stock market’s biggest stocks and just passively follow them. A computer program would execute the buy and sell orders to keep the fund in line with the index it was tracking.

Pushing this new trend was a man called John ‘Jack’ Bogle, who began life as very much against the index fund idea, but soon was won round by the logic. He created a new company called Vanguard which in turn created the Vanguard 500 Index.

The beauty of Index funds was that without stock brokers picking the stocks and taking healthy commissions and fe

es for their services – they were exceptionally cheap to run. These savings could be passed to the consumer and therefore make the index fund product – and the returns they could deliver – even more attractive. Wigglesworth identifies the index fund as having liberate trillions of dollars since their inception – away from the brokers and into the saving funds and pension pots of millions of ordinary Americans and others around the world. A truly beneficial and incredible force for good.

The losers have been the stock brokers themselves who have played a dirty smear campaign against most index funds – at least initially. However, it was a losing battle and now the majority of the world's savings are held in some sort of index fund.

On the back of the index fund came the ETF (Exchange Traded Fund) which essentially did the same thing but allowed for more flexibility in when they could be bought and sold.

However – two problems are now appearing with the direction of investments using index funds, and they are two trends that are both problems (and possibly contain an element of a solution within each of them).

Firstly, the explosion in the types of ETFs – from Christian values to veganism, to defense to whatever – means that many ETFs are now moving away from the whole premise of tracking an average index and are becoming so specialized that they risk becoming volatile again – just like when stock brokers picked the stocks!

Secondly, by everyone following the average it means that capital and investment are chasing fewer and fewer companies. If you are in the S&P500, then you’re sorted – no drama – but any company trying to break in or be innovative is less likely to receive capital as there are fewer brokers out there researching the next big and allocating capital accordingly.

As a spin-off of this, a third problem is in how index fun

ds decide which companies can and cannot go into their fund. The slig

htest change to how they are calculated could exclude one company (or even an entire industry/region) from access to billions of dollars in capital – and vice versa. The book contains anecdotes of Latin American countries growing so fast that they are reclassified as no longer being developing and are therefore bumped out of the index funds that had been fuelling them with capital. Similarly, some companies might be reclassified as ‘consumer electronics’ from ‘technology’ and fall out of large ETFs that were keeping their stock prices high.

IT is a fascinating book about a fascinating subject. Very much worth a read.

Notes and highlights for


Wigglesworth, Robin

Chapter 1: BUFFETT’S BET

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The finance industry has historically been adept at inventing new products that line its own pockets more than those of Main Street . The index fund is a rare exception to the rule


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Diversification , such as can be achieved through a broad , passive portfolio of the entire stock market , is the only “ free lunch ” available to investors , Markowitz argued .


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In 1970 , Keith Shwayder graduated with a degree in economics from the University of Chicago , and returned home to Denver to work at the family business , the luggage maker Samsonite . He had drunk heavily from the well of financial academia at his alma mater , and was horrified to realize that the company’s pension fund was invested in a bunch of poorly performing mutual funds . For someone steeped in the theory of efficient markets , it was anathema . Shwayder called up his former teachers and asked whether there was anyone out there who was managing money in a more modern , theoretically sound fashion . 18 They put him in touch with McQuown , who promptly flew to Denver to thrash out what Samsonite wanted to do . “ I had no budget constraints , so if I wanted to get on an airplane and go someplace , I got on the airplane , ” McQuown recalls . Wagner and Cuneo , McQuown’s main lieutenants at Management Sciences , did the basic design and development , 19 but the skunk works wasn’t allowed to manage money itself . So a new unit called Wells Fargo Investment Advisors ( WFIA ) was set up to house this weird new product . Vertin’s department handled the day - to - day operations , and the fund itself would be managed by Fouse . Although little remarked upon at the time , WFIA would end up becoming the kernel of the biggest investment empire in the world several decades later . The plan was to invest an equal amount of money in each of the fifteen hundred or so stocks listed on the New York Stock Exchange , as this was the closest approximation to the entire US equity market . And in July 1971 , the first - ever passively managed , index - tracking fund was born , courtesy of an initial $ 6 million investment from Samsonite’s pension fund

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Of course , as the writer Upton Sinclair once observed , it is difficult to get someone to understand something when their salary depends on them not understanding it .


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Most’s eclectic background also provided the spark behind the invention of what would become known as the ETF . During his travels around the Pacific , he had appreciated the efficiency of how traders would buy and sell warehouse receipts of commodities , rather than the more cumbersome physical vats of coconut oil , barrels of crude , or ingots of gold . This opened up a panoply of opportunities for creative financial engineers . “ You store a commodity and you get a warehouse receipt and you can finance on that warehouse receipt . You can sell it , do a lot of things with it . Because you don’t want to be moving the merchandise back and forth all the time , so you keep it in place and you simply transfer the warehouse receipt , ” he later recalled . 19 Most’s ingenious idea was to , after a fashion , mimic this basic structure . The Amex could create a kind of legal warehouse where it could place the S & P 500 stocks , and then create and list shares in the warehouse itself for people to trade . The new warehouse - cum - fund would take advantage of the growth and electronic evolution in portfolio trading — the simultaneous buying and selling of big baskets of stocks first pioneered by Wells Fargo two decades earlier — and a little - known aspect of mutual funds : They can do “ in kind ” transactions , exchanging shares in a fund for a proportional amount of the stocks it contains , rather than cash . Or an investor can gather the correct proportion of the underlying stocks and exchange them for shares in the fund .

Chapter 17: THIS IS WATER

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SOME OF THE NEGATIVE side effects are fairly uncontroversial , with only the degree and importance disputed by proponents and detractors of passive investing . Given that most index funds are capitalization - weighted , that means that most of the money they take in goes into the biggest stocks ( or the largest debtors ) . Critically , and contrary to popular conception , an index fund does not automatically buy more of a security simply because it has gone up in price , given that it already holds that security . But if the fund takes in new money , then that will go into securities according to their shifting size , and that can in theory disproportionately benefit stocks that are already on the up . For instance , over the past four decades , on average 14 cents of every new dollar put into the Vanguard 500 fund or State Street’s SPDR would have gone into the five biggest companies . A decade ago it was closer to 10 cents . Today , it is over 20 cents — the highest on record . 4 Although those bigger companies are , well , bigger , those extra cents can have a disproportional market impact , according to a 2020 study . 5 In other words , size can beget size , a dynamic that could contribute to the tendency of financial markets toward bubbles , according to critics .

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Yet in Green’s view , the biggest effect comes from how index - tracking strategies have now vacuumed up so much of the stock market . They have been the dominant “ bid ” — Wall Street parlance for the buyer — for stocks over the past decade . That leaves fewer shares for everyone else , even though their holdings aren’t excluded from index calculations . This is an issue because most big benchmarks like the S & P 500 are nowadays “ float ” - adjusted rather than purely value - weighted . In other words , how much space they have in an index is determ