One of the greatest inventions
Posted by Robin Powell on July 13, 2017
Have you ever noticed how many hugely intelligent people advocate index funds? They include several Nobel Laureates and, of course, Warren Buffett. One other brainbox you may not have known to be in the indexing camp is Tim Harford, aka The Undercover Economist.
I was very excited to learn about Harford’s new book, Fifty Things That Made the Economy, which looks at the key inventions that have transformed the ways we work, play and live.
The big question I had was, Did the index fund make the list? And, sure enough, it does.
Harford has also made a series of short programmes with BBC Radio 4 to accompany the book, and here is the programme on index funds. It’s only nine minutes long, and well worth a listen.
For the benefit of those outside the UK who don’t have access, Harford’s enthusiasm for the index fund is clear. “It has already saved ordinary investors literally hundreds of billions of dollars,” he says. “That’s a big deal. For many it will be the difference between scrimping and saving or relative comfort in old age.”
The programme begins with Warren Buffett’s famous instruction to his wife regarding how to invest his money when he dies:
“Pick the most mediocre investment you can imagine. Put almost everything into a very low-cost S&P 500 index fund.”
Harford then charts the story from the founding of the Dow Jones Industrial Average in the1880s to the advent of “Bogle’s folly”, the first retail index fund, in the mid-1970s. Quite rightly, he gives special prominence to Paul Samuelson, the first American winner of the Nobel Prize in Economics, whose 1974 paper Challenge to Judgement, spelt out the fact that the vast majority of investment managers failed to beat the market after costs.
“A respect for evidence,” wrote Samuelson in that paper, “compels me to incline toward the hypothesis that most portfolio decision makers should go out of business — take up plumbing, teach Greek, or help produce the annual GNP by serving as corporate executives.”
And my favourite quote from the programme is also from Paul Samuelson. In an address he gave in Boston in November 2005, at the age of 90, Samuelson said:
“I rank this Bogle invention along with the invention of the wheel, the alphabet, Gutenberg printing and wine and cheese.”
The index fund really is one of humanity’s great inventions.