Mt.Hamilton/Bastiat Society - McQuarrie on Investing Before Bogle

The benchmark for active mutual fund managers has historically been the S&P 500 index. Back in the 1970s, index mutual funds were invented in part to escape the stock selection and market timing errors of active managers, enabling the ordinary investor to capture almost all the return on that index. The vast expansion of assets now under passive management speaks to the success of indexing.

About a decade into the indexing revolution, Jeremy Siegel came on the scene with his Stocks for the Long Run thesis. His two-century series indicated that stocks had always returned 6% to 7% real. At that rate, the buy-and-hold investor doubles real wealth every decade or so. Over thirty years, an investment of $10,000 might produce about $65,000 real, maybe $160,000 nominal. Siegel’s research added fuel to the indexing revolution: if you could do that well in a passive index fund, why gamble on doing even better with an active manager, at the risk of doing rather worse?

This talk will present a sobering reappraisal of the stock and mutual fund record. It will be one part debunking—the new, improved historical record does not paint as sunny a picture of stock market outcomes as Siegel’s scanty and outdated data. In the second part I will examine how well the mutual fund investor in the world did “Before Bogle”—before index funds came on the scene. The mutual fund record extends back to the mid-1920s, same as the S&P index. That’s a 50+ year record of how the ordinary investor performed before the advent of the modern index fund. I have compiled that performance record and will lay it out for your assessment.

You’ll come away with a more sober assessment of the potential rewards from investing in

stocks for the long run.

Resources

1. My paper in the Financial Analysts Journal:

https://www.tandfonline.com/doi/full/10.1080/0015198X.2023.2268556

2. An early draft of the mutual fund paper:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4457203

3. Jason Zweig’s column in the Wall Street Journal touching on the mutual fund history:

https://www.wsj.com/finance/investing/alternative-asset-fees-1f948c93

4. There is also a podcast on the FAJ paper: (scroll down the list here until you see my

name: https://link.chtbl.com/guidingassets?s_cid=smo_GA23_Speaker)

--------------------------------

Edward F. McQuarrie, Ph.D., is Prof. Emeritus at the Leavey School of Business at Santa Clara

University. After retiring from Santa Clara in 2016, he pursued new research interests in financial market history and retirement income planning. Projects under way include errors of estimate in historical index returns, the fitful nature of size and value effects, fluctuations in the corporate bond premium, the annuity wager, and payoff analyses for Roth conversions. Working papers describing his research in progress can be downloaded at https://ssrn.com/author=340720.

For more information, visit his website at edwardfmcquarrie.com. He also posts regularly at

bogleheads.org as user McQ and occasionally at medium.com under his name.

-------

Please join the Mont Hamilton/Bastiat Society to hear and interact with Edward McQuarrie on this financially important topic.

This meeting will be in-person for no more than 12 individuals only, including lunch and usually wine, provided by members who enjoy it and like to share. Join us for any and all of the intellectual stimulation, the edification, the camaraderie, the great view of Sliicon Valley & Mt. Hamilton and to meet new people.

------

About the Mont Hamilton Society - In 1947 Friedrich Hayek, an economist and social philosopher who later won the Nobel Prize, organized a meeting at Mt. Pelerin, a resort in Switzerland. Hayek convened a modest sized group of (39) economists, historians, philosophers and journalists for the purpose of supporting research and discussion on the role of markets vs. government. The Mont Pelerin Society is now a large and prestigious international organization.

In 2009, a group of friends began to meet in San Jose for the purposes of improving their understanding of economic theory, applying it to current events and sharing their understanding with others as well as promoting a joyous sense of camaraderie. In recognition of the example set by the Mont Pelerin Society, they decided to name their group the Mont Hamilton Society. Members understand the realities of the business world, share an interest in economic thinking, and value civil discourse from a variety of perspectives. Faculty and students from the Department of Economics at San Jose State University are frequent guests at Society meetings. In June 2017 the Mont Hamilton Society became the San Jose/Silicon Valley affiliate chapter of the Bastiat Society, an AIER.org project, hence our new name: Mont Hamilton/Bastiat Society. See our webpage for more information: https://www.aier.org/bastiatsociety/san-jose

There are no membership fees or organizational meetings at this time, but all interested are encouraged to join and participate.

If you would like to be on our invitations list, or know someone else who might like to receive notice of our 7 - 10 (or more - during pre-covid years) luncheons or other events per year, or if you have any questions, please send an email to:

[email protected]

You or your suggested contact(s) will receive an announcement/invitation and a reminder or two for each event as they are scheduled, or a prompt answer to your question/s.

These events are discussions, not standard lectures. To facilitate this, the in-person gatherings before Covid Lockdowns were kept "small," typically 12 - 24 individuals only. Some presentations are video recorded, depending on demand. Constructive feedback on our events and interest in recordings is welcome, since we are continuing to evolve our meeting formats.

Thank you for your interest.

Host or Publisher Mont Hamilton/Bastiat Society