Quote for the Week

In the fund industry, the average manager lasts five years, and the average investor owns four funds, so that’s four managers in the first five years, eight managers after ten years, sixteen after twenty years, and fifty-two over the entire sixty-five years. What is the possibility that fifty-two managers, coming and going, cleaning out their portfolios time after time, could with remote conceivability do as well as the index? The return you get from holding the market portfolio over sixty-five years—even a modest return—demonstrates the “miracle of compounding returns,” and the tremendous impact the cost of active management makes is “the tyranny of compounding costs.” The way mathematics works, this tyranny absolutely overwhelms the miracle of compounding returns; to wit, over an investment lifetime the active equity fund investor captures about 20 percent of the return available simply by holding an all-market index fund. — John Bogle (source)

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Samual Curtis Johnson had an idea. This wasn’t new. He had many ideas throughout life. But at age 53, he gave his idea a try. He started a parquet floor business in 1886.

Within two years, he had a small but thriving flooring business. He also had a customer base that wanted a better way to take care of their new floors. Soap and water ruined the floor finish and shellacs chipped and were a pain to deal with. His customers wanted something better.

With a little experimentation and a bathtub, Johnson created a floor wax. He gave it away, as an added service, with every new floor sold. What Johnson had done, though he didn’t know it yet, was diversify his business.

Soon, people he never sold new floors to, wanted to buy his floor wax. A happy accident turned a parquet floor company into a wax company that sold parquet floors. And another idea sprung from that. What if the wax could be used for things other than floors?

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Quote for the Week

Volatility matters on only two levels. First, if two portfolios have equal average returns, the portfolio with the lower volatility will earn the higher compound return. On the other hand, investors understand this phenomenon – either intellectually or intuitively – and tend to price volatile securities accordingly. The second consideration in volatility is much more important: when is the owner of the principal of the fund going to disburse that principal? A fund that is tied up in perpetuity could fluctuate all over the place without any consequences whatsoever. It is my impression that too many funds with long horizons are managed as though they were going to be disbursed in the next couple of years, largely because volatility makes people uncomfortable – which is irrelevant to the conditions on which a rational decision should rest. Fear of volatility can be costly to long-run returns and can unnecessarily constrain the freedom of managers to do their best. — Peter Bernstein (source)

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Quote for the Week

The only thing certain on the fortieth anniversary of the 1929 debacle is that some day, without fail, there will be another such disaster.

The reason is that the stock market is inherently unstable, the instability being related to its superbly orchestrated ability to attract people with a promise of effortless riches, give them a taste of such gains, give them the promise of a great deal more gain, persuade them that it is rewarding their financial acuity or that of the people who are managing their money, and then, usually, after overcoming some preliminary setbacks, which greatly adds to the general state of confidence, destroy these illusions in one mortal thud. What is necessary for a new disaster is only for the memories of the last one to fade and no one knows how long that takes. — John Kenneth Galbraith (source)

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Here’s what I’ve been reading for the past three months:

• Hedgemanship – The early success of hedge funds run by Alfred Winslow Jones and others, brought about copycats and increased interest. This book covers that early success and presents under the guise that you too can invest like a hedge fund without hiring a hedge fund manager. However, the author points out that even some hedge fund managers are not great at being hedge fund managers, so it’s not quite as easy he makes it sound.
• Stocks and Stock-Jobbing in Wall Street – This brief pamphlet sits as guide to the market back in 1848. The author, “a reformed stock gambler,” offers the ins and outs of Wall Street including a warning about “fancy stocks” — the hot stocks of the day — that traded at ridiculous multiples but had little to no value.
• The Essence of a Family Enterprise – This book is a collection of essays reflecting on the S.C. Johnson & Son’s 100th anniversary in 1986. It outlines the principles and philosophies that made this family-owned business such a success.
• Fifty Years of Wall Street with Anecdotiana – Dean Mathey worked in Wall Street following a brief tennis career and chaired Princeton’s investment committee starting in the late 1920s for 34 years. I was lucky enough to find a rare copy of this, his autobiography. He covers the period from 1912 to the early 1960s. Though, notably, his focus is the first half of the 50-year period.
• New Levels in the Stock Market – Among those who believed the market cycle was obsolete in the late 1920s was Charles Amos Dice. He was a professor at Ohio State University and published this book in 1929. The NY Times even gave it a nice writeup two weeks before the crash. According to J.K. Galbraith, Dice had complete faith in the “new era” economy. Galbraith’s mention drove me to dig it up and I’ll have more once I finish reading.

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