To be honest, this story is more than a story of how powerful information can be. It is also a story about the power of money, the advantages of taking the long view, sticking to your principles and refusing to take short cuts even when it seems like others are doing it and succeeding, while you aren’t. It’s a lesson that anyone has to learn if they want to do business for the long haul and build both a long lasting enterprise and an above board reputation. But first, let us start with the power of information.
No matter how good you are, no matter how right your processes, your products, your offering and your values? You will not succeed if no one knows about you. An illustration of this is one of my eternal favorite investment companies: The Vanguard Group. Jack Bogle came onto a now banal insight: investment returns is a function of the performance of the underlying holdings, less any fees and commission costs. Therefore, all things being equal, the lower the fees and commissions you pay, the better your investment returns. Using that insight, he developed a simple way to track the market using very very low cost, barely traded indexes versus the active traded approach favored by most investment managers. It was simple arithmetic and it worked. His funds performed better and added a few percentage points above the typical fund due to it’s lower costs. Plus it tracked markets,so when active managers failed to make the market return, Vanguard did it easily. Yet, people didn’t flock to his fund. Because they didn’t know about it. You see, back in 1976 when Bogle started his first index, there was no Internet as we know it, no MorningStar, no Yahoo! Finance, etc. To put money in a fund, you had to go down to your broker and ask for advice. The brokers themselves didn’t sell you the best fund around, they simply recommended to you the funds that paid them to sell to you, and since Vanguard was too low cost to pay brokers to sell to you? No one heard about them.
For years, he had the best investment offering. His strategy and math was spot on and inarguable. His returns proved it. Yet, for the first 15 years, his funds went nowhere. He had less than $3 billion under management after almost 20 years, which represented barely a sliver of the market. There was enormous pressure on him to change his tactics, to charge more, and pay an army of bank salesmen to push his funds out there. He refused to do that, on principle. He refused to adopt an active approach or bend his strategy to what was more easily salable. So he continued to have little market share, while the vast investment public continued to suffer negative and terrible returns due to high fees and hyper active management.
All of that quickly changed as the information age started to come in and investment publications began to multiply. From 1976 to 1991, Vanguard was able to gather $3 billion assets under management. Between 1991 to 1998, they grew to $500 billion. Today, they’re over $3.5 trillion and they’ve become synonymous with indexing, which has become the preferred way to manage investments for most people. As a result, most people at least who buy index funds can make very low cost market returns, which was not easily obtainable in the past due to information asymmetry.
And that is the story. There is a lot one can take away from that, but the most important lesson to me is that we live in an era where information is easily available on so many things that it is astonishing what we are capable of doing if we will keep our minds open and utilize the available information efficiently.
This is one of the best times to be young and alive. The most valuable resource on the planet is information and it is available right on your finger tips. Use it wisely.
My company can make you returns of around 3% monthly, or 42% annually. Certain terms and conditions apply. If you’re interested in learning more and figuring out how we can help you make better returns on your investment, reach out to me on twitter @eldivyn