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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

Highlight (yellow) - Page 18 · Location 623

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


Highlight (yellow) - Page 40 · Location 959

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

Highlight (yellow) - Page 82 · Location 1589

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 .


Highlight (pink) - Page 174 · Location 2957

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

Highlight (yellow) - Page 266 · Location 4300

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 .

Highlight (orange) - Page 268 · Location 4329

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 determined by the value of shares that are actually freely available to trade , rather than its total value . Imagine a $ 10 million public company whose founder owns half of its 1 million shares . That means 500,000 shares still trade freely on the stock market , and their $ 5 million value determines its weighting in indices — not $ 10 million . But index funds might now own another 20 percent , which they never sell unless they suffer investor withdrawals . That means other investors are in practice buying and selling just 300,000 shares worth $ 3 million , even though the value used to calculate the company’s index weighting is $ 5 million .

Highlight (yellow) - Page 271 · Location 4371

To many critics there is a potentially dangerous feature at the heart of bond ETFs . While ETFs trade like shares on a stock exchange , some bonds trade only rarely ,

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But almost every corner of the fixed - income market is less actively traded than stocks . The worry among some skeptics is that a bond ETF struck with a spate of investor withdrawals might be unable to sell its holdings to meet them , and collapse . That could in turn spark fears over fixed - income ETFs at large , leading to a frenzied rush for the exit that triggers a broader bond market collapse .

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FERNANDO IS NO APOLOGIST FOR the investment industry , arguing that despite huge strides over the past two decades there are still many mediocre money managers who spend too much time and money chasing the latest hot idea . As a result , retail investors often “ get taken for a ride , ” she concedes . But she worries that the now - indiscriminate shift into passive investment strategies is eroding the central role that financial markets play in the economy , with money blindly shoveled into stocks according to their size , rather than their prospects . “ The stock market is supposed to be a capital allocation machine . But by investing passively you are just putting money into the past winners , rather than the future winners , ” she argues . In other words , beyond the impact on markets or other investors , is the growth of index investing having a deleterious impact on economic dynamism ?

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The most cutting , colorful illustration of this conundrum is from Inigo Fraser - Jenkins , the Bernstein analyst who penned the sarcastic homage to a fictional indexer attempting to build the Ultimate Index . In 2016 , Fraser - Jenkins published an even punchier report entitled “ The Silent Road to Serfdom : Why Passive Investment Is Worse Than Marxism . ” His argument was that at least communist countries attempted to allocate resources to the most important areas . This may be less efficient than the decentralized , markets - oriented allocation method of capitalism , but it is still better than blindly allocating money according to the vagaries of an arbitrary index .

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But most fund managers willingly admit that the average skill and training of the industry keeps getting higher , requiring constant reinvention , retraining , and brain - achingly hard work . The old days of “ have a hunch , buy a bunch , go to lunch ” are long gone . Once upon a time , simply having an MBA or a CFA might be considered an edge in the investment industry . Add in the effort to actually read quarterly financial reports from companies and you had at least a good shot at excelling . Nowadays , MBAs and CFAs are rife in the finance industry , and algorithms can read thousands of quarterly financial reports in the time it takes a human to switch on their computer .

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In fact , the number of CFAs per listed company has risen from four to fifty - one in the past two decades , according to Citi . These days , even PhD economists aren’t guaranteed jobs in asset management , unless they have married their degree with a programming language like Python , which would allow them to parse vast digital datasets that are now commonplace , such as credit card data , satellite imagery , and consumer sentiment gleaned from continuously scraping billions of social media posts . Beating the market is not impossible . But the degree of difficulty in doing so consistently is far greater than it was in the past . Even giant , multibillion - dollar hedge funds staffed with an army of data scientists , programmers , rocket scientists , and the best financial minds in the industry can struggle to consistently outperform their benchmarks after fees . To use Mauboussin’s poker metaphor , not only are the remaining players around the table the best ones , but new ones entering the game are even more cunning , calculating , and inscrutable than in the past.fn4


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The biggest challenge in the coming era of passive investing will be to navigate the balance between being passive and active owners , especially at a time of intense political and cultural polarization .

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THE ANODYNE GREENBERG LOUNGE IN New York University Law School’s Vanderbilt Hall was an unlikely setting for a testy meeting of investors , regulators , and economists on December 8 , 2018 . But the hearing , arranged by the Federal Trade Commission , tackled one of the most controversial theories dogging the index fund industry : “ Common ownership . ” The common ownership theory is that companies have fewer incentives to invest in new products or services , or to compete on price , if they know that their biggest shareholders also own big chunks of their rivals . The suggestion is not that they engage in overtly anticompetitive deals thrashed out in secretive smoke - filled rooms , merely that significant cross - shareholding may have an indirect , almost psychological dampening effect on the competitive urge of companies . Although this applies to any pooled , large investment vehicle — such as mutual funds — the de facto oligopoly of the index fund industry makes it a particularly pertinent issue for BlackRock , Vanguard , and State Street , which collectively are the largest shareholders of over four - fifths of all S & P 500 companies .


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However , despite the litany of problematic potential side effects examined in the last few chapters , it is important not to lose sight of Bogle’s point : In the annals of Wall Street , the index fund is one of the few truly , nearly unambiguously beneficial inventions , a disruptive technology that has already saved investors hundreds of billions of dollars , sums that will undoubtedly reach trillions in years to come . Just consider the implications for a moment . Pretty much everyone saving for their retirement , to send their kids to university , to buy a house , or just for a rainy day indirectly or directly reaps the benefits of the humble index fund .


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