2013

On August 5, 2013, the Graham family announced the sale of the Washington Post newspaper to Jeff Bezos through a newly formed holding company called Nash Holdings LLC, for $250 million in cash. The Washington Post's own reporting on the deal noted that the purchase price was richer than what many other legacy print properties had fetched in recent years, and quoted analyst Craig Huber observing that the same newspaper would have sold for $2 billion a decade earlier. The transaction included the newspaper and closely held related ventures but excluded the downtown Washington office buildings, the Robinson Terminal warehouses in Alexandria, the Post-Newsweek television stations, and stand-alone properties including Slate, The Root, and Foreign Policy. Bezos, then primarily known as Amazon's founder, bought the paper personally rather than through Amazon — a structural choice that gave him editorial independence and positioned the acquisition as a side bet on the future of journalism.

At the 2013 Daily Journal annual meeting, I told the audience that the discipline of inversion, applied to the question of how to allocate capital, produced a different portfolio from the discipline of pursuing the highest expected return directly. The inverter asks the opposite question: what would guarantee the destruction of capital, and how can I avoid that? The capital-allocation-discipline point I tried to convey was that the investor who enumerates the failure modes, and who refuses to do the things that would produce them, has a long-run advantage over the investor who chases the highest expected return without considering the failure modes. The discipline required is to slow down, to write down the failure modes, and to refuse to act until the failure modes have been enumerated and the actions that would produce them have been refused, even at the cost of looking indecisive during the boom. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes by pursuing the highest expected return without enumerating the failure modes, and the cost of those mistakes had, in dollar terms, been very large. The lesson I drew was that the disciplined investor must assume that the failure modes are present in every decision, and he must build the discipline of inversion into his process before the decision is made. The 2013 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act until the failure modes had been enumerated and the actions that would produce them had been refused. The investor who builds the discipline of inversion will outperform the investor who chases the highest expected return directly. The capital-allocation-discipline lesson I tried to convey was that the investor who avoids the destruction of capital, and who allows the desired outcome to emerge from the avoidance, has a long-run advantage over the investor who chases the highest expected return directly, because the things that produce the destruction of capital are well known and easy to avoid, and the things that produce the highest expected return are difficult to obtain and easy to lose. The 2013 meeting was, in some ways, the most useful I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to do the things that would produce the destruction of capital, and to allow the desired outcome to emerge from the avoidance. The investor who builds the discipline of inversion will outperform the investor with the higher IQ who chases the highest expected return directly.

Dong was widowed at age 36 with a three-year-old son; she left the boy with his grandmother, quit her government chemistry-lab administrative job, and moved to Guangdong province (settling in Zhuhai), joining Haley (Gree's predecessor) as an air-conditioner saleswoman.

In his 2013 letter to Icahn Enterprises holders, Icahn laid out what he called the country's governance problem: boards chosen by chief executives, compensation consultants rewarding mediocrity, and a system he argued rewarded insiders over owners. The letter made the case that activist investing was not a disruption of good governance but a substitute for its absence.

Bloomberg reported in February 2013 on Baupost's annual letter to clients, in which Seth Klarman warned that years of monetary support from the Federal Reserve had created hidden financial risks that would surface when policy was eventually withdrawn. Klarman argued that the suppression of interest rates had forced investors into riskier assets in pursuit of yield, distorting the price of almost everything across credit, equity, and alternative markets and creating what he described as a kind of artificial plateau that hid the true cost of capital beneath a veneer of stable spreads. He observed that the apparent stability of the post-crisis period was itself a product of the suppression, and that the suppression could not be sustained indefinitely without producing distortions of its own that would eventually require repricing and that would eventually surface in the form of dislocations across multiple asset classes simultaneously. The letter's core concern was that the apparent calm of the post-2008 era was not genuine stability but rather the suppression of volatility by policy intervention, and that the resulting complacency had encouraged leverage and risk-taking that would be exposed when the suppression lifted. Klarman warned that the next phase, in which rates would eventually normalize, could expose how much of the recovery was funded by leverage extended at low rates and how thin the equity cushion beneath that leverage actually was. He was particularly concerned that the credit cycle had been artificially extended, pushing defaults and restructurings further into the future where they would compound rather than resolving in the normal way. He described this as a kind of policy-induced moral hazard in which investors behaved as if the central bank had removed downside risk entirely, and as if the puts that the Federal Reserve had effectively written were costless to the system as a whole. The Bloomberg coverage noted that Klarman's warning was unusual in its specificity, naming the very mechanisms by which the post-crisis calm could unwind rather than relying on a general unease about monetary policy. He compared the artificial suppression to a coiled spring that could release in either direction, and argued that the prudent posture was to maintain enough dry powder to act when repricing finally arrived rather than to extend further into the same risk premia that the policy had compressed. The 2013 letter became one of the most circulated Baupost documents because its warnings proved to be early rather than wrong, anticipating the dislocations that arrived in subsequent years as policy was eventually normalized and as the structures that had been built on the assumption of perpetual accommodation were tested by rising rates and by the reversal of cross-asset correlations that the suppression had sustained.

In his 2013 Giving Pledge letter, Premji credited his mother as the most significant influence on his early life. A medical doctor who never practised, she spent close to fifty years building and running a charitable hospital for polio and cerebral-palsy children in Bombay — giving Premji a hands-on model of how difficult, but necessary, sustained institutional philanthropy actually is.

In this BusinessLine conversation, Chauhan frames the cola business as structurally different from bottled water. Coca-Cola and Pepsi, he says, treat carbonated drinks as a 'bread and butter business' that requires constant attention to carton suppliers and cap suppliers, whereas Bisleri's water business is 'a cash business' that buys on credit and always carries sufficient stock.

Buffett argued that owning a whole business and owning a piece of one through the stock market are economically the same act, and that Berkshire's mix of wholly-owned subsidiaries and marketable securities was a single portfolio chosen by the same standard. He wrote that the only differences were tax and control, and that the mistake many investors make is to treat 'investing' and 'acquiring' as different disciplines.

On the unity of investing in whole businesses and in marketable securities.

“BIG MONEY IN BOSTON” . . . The Commercialization of the “Mutual” Fund Industry Remarks by John C. Bogle, Founder and Former Chairman, The Vanguard Group1 Before The Boston Security Analysts Society, Inc. May 17, 2013 You could say, with accuracy, that I’ve been preparing to tell this story for more than 63 years, and I thought it only proper to tell it here in Boston. My preparation began in December, 1949, a long, long time ago. Then, almost halfway through my junior year at Princeton University, I was in the reading room of the newly built Firestone Library, trying to keep up with current developments in Economics, my major study. I was reading the December issue of FORTUNE magazine. When I turned to page 116, there was an article entitled “Big Money in Boston.” Exhibit 1. That serendipitous moment would shape my entire career and life. 1. 1 The opinions expressed in this speech do not necessarily represent the views of Vanguard’s present management.

Brad Stone's 2013 book The Everything Store: Jeff Bezos and the Age of Amazon became the canonical outside account of Amazon's first two decades. Published by Little, Brown and Company, it documented the company's 1990s rise, near-demise during the dot-com bust, and revival through the launches of Amazon Prime, the Kindle, and Amazon Web Services. Stone, a journalist with extensive access to former Amazon executives and to Bezos's parents and friends — though only limited interaction with Bezos himself — traced the founder's trajectory from his time at the quantitative hedge fund D.E. Shaw through the founding decision in 1994. The book won the Financial Times Business Book of the Year award in 2013 and was translated into more than 35 languages. MacKenzie Bezos, then Bezos's wife, posted a widely noted one-star Amazon review contesting the book's accuracy, while acknowledging only one specific factual error.

On the afternoon of May 26, 1937, United Auto Workers organizer Walter Reuther arrived at the Miller Road Overpass at Gate 4 of Ford's River Rouge complex with clergymen, representatives of the Senate Committee on Civil Liberties, and dozens of women from UAW Local 174 wearing green berets and carrying leaflets that, in substance, presented the union as an alternative to Fordism. Reuther posed for photographs with organizational director Richard Frankensteen and a few other organizers, the Ford Motor Company sign visible in the background. Then Harry Bennett arrived with his entourage. Bennett, one of Henry Ford's right-hand men, ran the Ford Service Department, a private police force of ex-convicts, ex-athletes, ex-cops, and gang members. What followed, captured on film by Detroit News photographer James Kilpatrick, was a beating of Reuther and Frankensteen so public that corporate violence against union organizers became, briefly, impossible to deny.

PBS American Experience's profile emphasizes that Ford legitimized antisemitism at a scale no private individual had matched in American history. In 1918 Ford purchased his hometown newspaper, The Dearborn Independent, and roughly a year and a half later began publishing a series of articles claiming a vast Jewish conspiracy was infecting America; the series ran in ninety-one consecutive issues. Ford then bound the articles into four volumes titled The International Jew and distributed some five hundred thousand copies through his vast network of dealerships and subscribers. The PBS account, drawing on historian Hasia Diner, judges the rhetoric to be unremarkable in content but extraordinary in scope. Ford also republished the Protocols of the Elders of Zion, a notorious Russian forgery claiming an international Jewish conspiracy controlling world events. As one of the most famous men in America, Ford gave antisemitic ideas authority they would not otherwise have received.

PBS American Experience's 2013 documentary profile frames Henry Ford as a farm boy who rose from obscurity to become the most influential American innovator of the twentieth century, a formulation that captures both the scale of his achievement and the limits of the heroic genre. The documentary situates Ford within the larger transformation of American industry, agriculture, and daily life that his Model T, his moving assembly line, his five-dollar day, and his River Rouge complex together set in motion. The profile also treats Ford's antisemitism and his late-career resistance to organized labor as central to his record rather than as footnotes to it. Read alongside the museum and archival sources, the documentary offers a single-volume biography of a founder whose operating philosophy, vertical integration, and philanthropic scale each shaped the institutions of twentieth-century capitalism, while his public judgment failed him in measurable and consequential ways.

In a December 2013 interview published by the Yale School of Management, David Swensen sat with the school's communications office to discuss the management of the university's endowment, then at roughly twenty billion dollars in assets. He used the conversation to restate the principles that had guided the Investments Office since he had taken it over in 1985, framing the work as the disciplined pursuit of long-term, risk-adjusted returns rather than the chase for short-term performance. He stressed that the structure of the portfolio was the dominant decision, that asset allocation accounted for the overwhelming majority of the variability of returns, and that the work of the office was to build a portfolio whose composition would survive a range of macro regimes rather than to forecast any single one of them. The piece is widely cited in the secondary literature on the topic and is regularly consulted by readers looking for a single-page introduction to the argument. He told the school that the Yale approach rested on a willingness to own assets that other institutions would not, including private equity, venture capital, real estate, and absolute-return strategies, and to hold them at weights that exceeded the conventional institutional benchmark. He argued that the illiquidity of those assets was not a cost to be paid but a structural feature that produced a return premium, since the premium was the compensation for the willingness to long-term forgo the daily liquidity that the public market offered. He was careful to distinguish the institutional case for active management in the alternative asset classes from the case for active management in the public market, where he had long argued that the evidence in favour of passive index funds was overwhelming for the individual investor. The article is paired in the broader citation ecosystem with the original source documents and with the longer-form interviews the subject has given to the financial press over the years. He closed the interview with a reflection on the people who had built the Investments Office. He said the most durable decision he had made was the decision to staff the office with people who intended to spend their careers at Yale, since the long holding periods of the alternative asset classes meant that the relationships built in the early years of a career would still be producing deal flow decades later. He told the school that he had turned down offers to leave for higher-paying positions and that he considered his role at Yale a public service rather than a commercial proposition. The interview is treated as a clean statement of the philosophy that guided the office through the end of his tenure and into the years that followed his death in 2021. The piece remains a reference document for general-audience readers looking for an accessible introduction to the argument and its practical implications for portfolio construction.

The U.S. Financial System: Look Out! Change Is Coming. The G.S. Beckwith Gilbert ’63 Lecture by John C. Bogle, ’51, Founder of The Vanguard Group Princeton University February 21, 2013 I’m honored to be invited to present the 2013 Gilbert Lecture, whose sponsor, Beckwith Gilbert, Princeton Class of 1963, sought “to bring innovative leaders in business, government, and the professions to discuss their ventures and the insights gained in their careers.” About two-thirds of my remarks deal with the pros and cons of innovation in the financial services field and the new values of our market system, with the remaining one-third directed—primarily to Princeton undergraduates—to some lessons I’ve learned and insights I’ve gained over my sixty-one year career. As I’ll momentarily note, I have tried to do my best, not only to develop innovations designed to serve investors, but to have the temerity to challenge the fundamental tenets that my industry holds dear. As Nobel Laureate Paul Samuelson wrote in his introduction to my first book (Bogle on Mutual Funds, 1994), I had “changed a basic industry in the optimal direction. Of very few can this be said.” Time, as you will soon learn, has proved that Dr. Samuelson’s insight was well founded, and the five major innovations that I’ve been responsible for developing have set the stage for radical changes in our industry and in our financial system. The impact of those changes is now accelerating, and more change is coming.

In his October 2013 open letter to Apple's chief executive, Icahn argued that the company's shares traded far below intrinsic value and that a very large tender-financed share repurchase — he suggested on the order of 150 billion dollars — would be accretive for remaining shareholders without endangering the balance sheet. His framing was classic Icahn: he praised the business effusively while insisting its board was misallocating capital by leaving the repurchase too small.

Icahn argued that the dysfunctions he attacked were structural, not personal: managers of even well-run companies had incentives to entrench themselves, and only a holder with a large enough stake and no career relationship with management could force the questions that needed asking. This was his standing defense of the raider label the press had given him.

In ten fact-filled pages, “Big Money . . .” described the history, policies, and practices of Massachusetts Investors Trust. M.I.T. was the first and by far the largest “open-end fund,” founded in 1924, a quarter-century earlier. In its discussion of the embryonic industry’s future, FORTUNE was optimistic that this tiny—“pretty small change”—industry, “rapidly expanding and somewhat contentious, could become immensely influential . . . the ideal champion of the small stockholder in controversies with . . . corporate management.” In those ancient days, when the term “open-end” was used, it identified the type of investment company that redeemed its shares on demand.2 The term “mutual fund” had not yet come into general use, perhaps because “mutual” funds, with one notable exception, are not mutual. In fact, contrary to the principles spelled out in The Investment Company Act of 19403, they are “organized, operated, and managed” in the interests of the management companies that control them, rather in the interests of their shareowners.4 So FORTUNE relied largely on terms such as “investment companies,” “trusts,” and “funds.

Chauhan expresses pride that Thums Up remains India's number one cola despite years of multinational competition. He frames it as 'a great feeling that Thums Up is still number one' and notes that the multinationals' own brands have not been able to overshadow Thums Up — vindication that the Indian-built brand had stronger consumer pull than the global parents who bought it.

Icahn wrote that he intended to keep buying Apple stock himself, which he did, and positioned his proposal as friendly rather than hostile: no board seats demanded, just a bigger buyback. Analysts at the time noted the letter moved the stock within minutes of publication — an early demonstration of how a public activist letter on social media could move a mega-cap.

Sent to a poor province, Anhui, Dong produced one-eighth of Gree's annual sales in her early sales role, which caught the attention of Gree's first general manager Zhu Jianghong; she rose to head of sales by 1994, deputy president by 1996, president by 2001 (per Yicai, 2007), and chairwoman by 2012.

Premji wrote that newly independent India buzzed with idealism and a genuine sense of nation-building, and that this influenced him deeply. He explicitly invoked Gandhi's notion of holding wealth in trusteeship, to be used for the betterment of society rather than as if one owned it — the philosophical anchor for everything that followed.

So, as my title warns, Look Out! Change Is Coming. Five Innovations The creation of Vanguard in 1974 was, most importantly, an experiment in the search for an organizational structure that would focus on placing the interests of fund investors ahead of the interests ____________ Note: The opinions expressed in this speech do not necessarily represent the views of Vanguard’s present management.

The campaign ended with Apple accelerating its repurchase program in 2014 and Icahn declaring victory and moving on, though he later sold his stake in 2016 citing China risk for the iPhone business. The episode became a template study in modern activism: concentrated capital, an economic argument stated in plain language, and public pressure applied without a proxy fight.

of their money managers. To accomplish that goal, this tiny new organization—managing but $1-billion- plus and with only 28 employees (we call them crewmembers)—employed a mutual structure, in which the (truly) mutual funds and their shareholders would own and control their own management company, which would operate at cost. The Vanguard Experiment in fund governance, then, began with a unique structure that had never before been tested or tried. 1974. Innovation # 1. Next, our investment strategy would be focused on the fact—confirmed by volumes of independent data, again and again—that beating the market is a zero-sum game for investors. Why? Simply because the average manager must, by elementary arithmetic, be average. Money managers, as a group, must provide the market return, for after all, they are the market. But that return comes only before their exorbitant fees, operating expenses, and portfolio turnover costs are deducted. So, after absorbing the burden of those costs, the average manager must—and will—lose to the market. The zero-sum game before costs becomes a loser’s game after costs. For the cognoscenti, fund managers in aggregate produce zero Alpha before those costs, but negative Alpha after the costs of financial intermediation are deducted. So, the first decision of the newly-formed Vanguard Group was to create the world’s first market index mutual fund, an idea that I had hinted at in my Princeton senior thesis of a quarter-century earlier.

He recounted how in 1966 he had to drop out of Stanford on his father's untimely death (completing his engineering degree only in 2000) and returned to India at age twenty-one to run the small family business. Over the next three decades he focused on building Wipro into a successful, professionally run organisation — a period he described as the precondition for everything he could later give away.

BusinessLine records that in 1977, Ramesh Chauhan with brother Prakash and then-Parle CEO Bhanu Vakil launched Thums Up as the flagship cola. When Coca-Cola re-entered India in 1993, Parle sold Thums Up, Limca and Gold Spot to Coca-Cola for around $60 million — at a time when Thums Up held 85% market share in the Indian cola category.

” 1951 – The Princeton Thesis That article was the springboard for my decision—made almost immediately—to write my thesis on the history and future prospects of open-end investment companies, with the title simplified to “The Economic Role of the Investment Company:” After an intense analysis of the industry, I reached some clear conclusions: Investment companies should be operated in the most efficient, honest, and economical way possible . . . Future growth can be maximized by reducing sales charges and management fees . . . Funds can make no claim to superiority over the market averages (indexes) . . . the principal function of investment companies is the management of [their] 2 The “closed-end” fund has a fixed number of non-redeemable shares outstanding. 3 Section 1(b)(2): (Mutual funds) must be organized, operated, and managed . . . in the interests of their shareholders . . . rather than in “the interests of their officers, directors, investment advisers, and distributors.” 4 At the 1968 Federal Bar Conference on Mutual Funds, former SEC Chairman Manuel Cohen gave a speech entitled “The ‘Mutual’ Fund,” putting quotation marks around the word mutual, since “its salient characteristics raise the serious question whether the word ‘mutual’ is an appropriate description.”

The letter also updated holders on the portfolio approach of Icahn Enterprises — concentrated positions in companies he judged cheap, activist engagement to close the gap, and hedging of the broad market he described as overpriced. He framed the vehicle explicitly as a way for ordinary investors to access activism at scale.

By owning the entire stock market (or almost all of it) and eliminating about 95 percent of the frictional costs of investing, Vanguard 500 Index Fund would be guaranteed to beat the returns earned by financial managers in the aggregate. Our Index Fund was formed in 1975 and, after a pathetically small IPO—$11 million—was offered to investors a year later. 1975 and 1976. Innovation # 2. At the outset, our mutual funds, like almost all others, carried substantial sales loads. Like their peers, they were offered to investors via our wholesale distributor through a network of stockbrokers. Now that the fund industry had begun to mature, it seemed obvious that the U.S. investing public— growing older and better-educated, and hence more cost-conscious—would someday easily support a no- load framework, with funds directly offered to investors. So we eliminated those pesky sales loads and abandoned our distribution system—the first firm to take this daring step. We did it only after much consideration of the huge risks involved, and without prior notice. February 1977. Innovation # 3.

Chauhan tells BusinessLine there are 'no regrets and no hard feelings' about the sale — calling it a 'simple business strategy' despite many critics at the time. He explains he did not have much choice because Parle was operating through a franchise system in which each franchise owned its own plant, and most franchises had already declared their intention to team up with Coca-Cola.

Premji told the Giving Pledge community that his experience in India had taught him that establishing effective operational and execution structures is much harder than committing or collecting money. That conviction drove his decision in 2001 to set up the Azim Premji Foundation as an operating organisation, working in collaboration with government to improve public schooling rather than merely writing cheques.

investment portfolios. Everything else is incidental . . . The principal role of the investment company should be to serve its shareholders. Over the centuries (or so it seems), such idealism has likely been typical of an inexperienced college senior. But, as you’ll see this afternoon, despite the passage of more than 63 years since I read that FORTUNE article, my idealism has hardly diminished. Indeed, likely because of my lifelong experience in the field, it is even more passionate and unyielding today. Following my graduation in 1951, Walter L. Morgan, Princeton Class of 1920, read my thesis. Mr. Morgan—the great hero of my long career, and the founder of industry pioneer Wellington Fund, offered me a job. I decided to join his small but growing firm—managing but a single fund, with assets of $150 million. “Largely as a result of this thesis,” he wrote to our staff, “we have added Mr. Bogle to our Wellington organization.” Although I wasn’t so sure at the time, it was the opportunity of a lifetime. Here’s a profile of the fund industry that I joined in 1951. Exhibit 2. There were but 125 mutual funds, with assets aggregating $3 billion. The field was dominated by a few large (for those days) firms, accounting for about two-thirds of industry assets. With assets of $472 million, M.I.T. was overpoweringly dominant, by far the industry’s largest fund, and by far the lowest cost provider (expense ratio 0.42 percent). Indeed while “Big Money in Boston” focused on M.I.T.

After selling the cola portfolio, Chauhan concentrated on bottled water — in which he tells BusinessLine he maintains a leadership position despite all competition. He frames the choice as a deliberate strategic refocus on a category whose cash economics suited his operating style, rather than as a retreat from carbonates. The water business had lower volatility, less supplier complexity and no franchise-related governance strain.

During the 1975-1985 era, following the devastating 50 percent stock market crash of 1973-1974, the prime focus of the industry shifted from stock funds to money market and bond funds. To carve out a competitive niche—with the realization that the “costs matter” principle applies in all asset categories— we established the first municipal bond mutual funds holding portfolios with strictly defined-maturities. Our long-term, intermediate-term, and short-term offerings (unique, but hardly the triumph of amazing brilliance!) quickly changed the structure of the entire bond fund sector. A new framework for bond management had emerged. August 1977. Innovation # 4. One of the crushing failures that preceded Vanguard’s formation was the abject failure of Wellington Fund. New managers had turned this classic conservative balanced fund, founded by Walter L. Morgan, Princeton Class of 1925, into a type of aggressive stock fund. In the1974 market crash— which was wholly predictable—Wellington flamed out, its hard-earned reputation shattered. By 1978, with the substantial demands of implementing those first four innovations behind us, it was time to turn to the task of restoring Wellington Fund to its earlier eminence. Not only returning it to its traditional balanced portfolio (65/35 stocks/bonds), but giving it a new focus—a focus on a specific and clear dividend objective.

, Boston itself was the center of the fund universe. Exhibit 3. The funds operated in this fair city dwarfed their peers—22 of the 50 largest funds, managing 46 percent of the industry’s assets. (For the record, New York funds represented 27 percent of industry assets; Minneapolis 13 percent; and Philadelphia only 7 percent.) Most firms, including Wellington, managed but a single fund, or a second fund that was usually tiny. For example, M.I.T. trustees also managed Massachusetts Investors Second Fund— hardly a name that would appeal to today’s mutual fund marketers!—with assets of just $34 million, only 7 percent of M.I.T.’s $472 million total.5 5 Five fund managers of that era operated multiple funds, each providing a wide selection of investment objectives and specialized portfolios—often 20 or more—focused on a variety of single industries. Designed for market timing, at first they grew with the burgeoning industry. During the 1960s, all had their moment in the sun, but none remain today.

He chose public education as the foundation's focus on the grounds that education is perhaps the most important social institution to empower individuals and shape a better society, and that the public school system is what best serves the disadvantaged and deprived. The choice privileged reach and equity over prestige causes like universities or hospitals.

In 2009, the foundation reviewed its strategy and decided to scale up by creating institutions — district and state-level bodies working on teacher capacity development, plus a university focused on education and related human development domains. To enable this, Premji donated about 8.7% of Wipro (then worth roughly two billion dollars) in December 2010 to create the foundation's endowment.

Chauhan positions himself as a 'savvy businessman sitting on cash reserves'. He discloses that proceeds were invested with Merrill Lynch — 'we can draw on the money any time we want' — and that Bisleri follows a policy of not borrowing. The 'we don't borrow' rule is presented as a strategic commitment to fund growth from internal accruals and invested cash, a notably conservative posture for an Indian consumer goods company of that scale.

The new, higher dividend would be earned by emphasis on more stable, income- producing value stocks, rather than on volatile, low-yielding growth stocks. It has worked splendidly, and shareholders have rejoined the fund in droves. Taking Wellington back to its roots but adding a specific dividend objective led to its renaissance. 1978. Innovation #5.1 How Have Our Innovations Worked Out? So, innovation has been the key to Vanguard’s remarkable growth. Let’s measure the results of each of those innovations: 1. Our mutual at-cost structure (combined with our extraordinary growth) has enabled us to slash our complex-wide expense ratio (expenses as a percent of assets) to less than 20/100 of 1 percent, fully 80 percent below the 1 percent industry norm, now saving our investors a cool $17 billion annually. 2. Our index innovation has changed the world of finance. Index funds now constitute fully 28 percent of equity fund assets, and assets of that original Vanguard 500 Index Fund have grown to $250 billion. Its sister fund, Vanguard Total Stock Market Index Fund also totals $250 billion, and assets of all of our index funds combined now total $1.3 trillion. 3. Our no-load (non-distribution) system last year produced a net cash inflow from investors of $142 billion, the largest inflow in the fund industry’s 1 Really a reverse innovation. But it saved the day.

Rank Fund Name Total Assets* (million) Notable Smaller Funds Total Assets* (million) 1 M.I.T. $472 Eaton & Howard $90 2 Investors Mutual 365 National Securities 85 3 Keystone Funds 213 United Funds 71 4 Tri-Continental 209 Fidelity 64 5 Affiliated Funds 209 Group Securities 60 6 Wellington Fund 194 Putnam 52 7 Dividend Shares 186 Scudder Stevens & Clark 39 8 Fundamental Investors 179 American 26 9 State Street Investment 106 Franklin 25 10 Boston Fund 106 Loomis Sayles 23 T. Rowe Price 1 Dreyfus 0.8 Total $2,239 Total $537 Percentage of Industry** 72% Percentage of Industry 17% *Includes associated funds. **Total industry assets: $3.1 billion. Mutual Fund Industry Assets, 1951 2. “Big Money in Boston”—1951 Percentage of Mutual Fund Assets Managed* Boston 46% New York 27% Minneapolis 13% Philadelphia 7% Other 7% 3. *By location of firm headquarters.

history. 4. Our bond fund asset base—some $550 billion—is the industry’s largest. And 5. Wellington Fund’s assets, which had tumbled by some 75 percent—from $2.1 billion to $475 million—in the early 1970’s market crash, have soared to $68 billion. Together, these innovations remain at the heart of Vanguard today. Combining the impact of these five major innovations along with other smaller innovations, Vanguard’s mutual fund assets under management now total $2.1 trillion, the largest fund complex in the world.2 (Please forgive the bragging, but the data are the data.) Our market share has risen to about 17 percent of the assets of all stock and bond funds, a commanding market share, the largest in industry history. The Vanguard Experiment that began in 1974 has become the Vanguard triumph of 2013. Why? Simply because it has served investors well. Interestingly enough, I’ve been preaching that message of reform for mutual funds for my entire 61-year career beginning with the idealistic principles that I articulated in my 1951 Princeton senior thesis on the mutual fund industry, entitled “The Economic Role of the Investment Company.” Here are some brief excerpts: [Mutual funds] should be operated in the most efficient, honest, and economical way possible . . . Future growth can be maximized by reducing sales charges and management fees . . . Funds can make no claim to superiority over the market averages (indexes) . . .

Chauhan emphasizes the structural simplicity of running a water business compared to a carbonated-drinks business: he no longer has to worry about glass bottles, sugar, citric acid, food colour or carbon dioxide gas. He is glad 'the headache has moved on to someone else', referring to Coca-Cola.

The Old Model . . . the New Model The idea of trusteeship—indeed the so-called “Boston trustee”—dominated the industry’s image, as this photo of the M.I.T. trustees in 1949 suggested. Exhibit 4. The original fund industry operating model was much like M.I.T.’s: professional investors who owned their own small firms, and often relied on unaffiliated distributors to sell their shares. (In those days distribution was a profitable business.) But the industry culture changed, and changed radically. In 1951—and in the years that immediately followed—the fund industry that I read about in FORTUNE was a profession with elements of a business. But soon it began its journey to become a business with elements of a profession (and, I would argue, not enough of those elements). Some notion of fiduciary duty and stewardship was crowded out by an overbearing focus on salesmanship, as management played second fiddle to marketing—gathering assets to manage. That is where our industry remains today. Trustees of Massachusetts Investors Trust 4. From left to right: George Whitney, L. Sherman Adams, Chairman Merrill Griswold, Dwight Robinson, and Kenneth Isaacs. What explains this profound change in the culture of mutual funds?6 I’d argue that these were the major factors: (1) Gargantuan growth.

At the time of the letter, the foundation had about 800 people spread across India, most working in disadvantaged regions, with plans to scale to 4,000–5,000 over the next five years. The headcount signalled Premji's bet that field presence at scale, not grant disbursement, was the binding constraint on education reform in India.

Premji committed to transferring more of his wealth to scale up the foundation's endowment, framing the act as a moral obligation: those privileged to have wealth, he wrote, should contribute significantly to create a better world for the millions far less privileged. He pledged to continue acting on that belief — a commitment he would later exceed by transferring the majority of his Wipro stake.

the principal function of investment companies is the management of [their]investment portfolios. Everything else is incidental . . . The principal role of the mutual fund should be to serve its shareholders. What should one make of these words? An intelligent design for the new structure of fund management that was created when I founded Vanguard in 1974? The idealistic ruminations of an immature and inexperienced college senior? Something in between? I’ll let you decide. But all through my career I have talked that talk, and through Vanguard, walked that walk, focusing on serving all of those honest-to-God, down-to-earth, individual human beings who have entrusted us to manage their 2 A sort-of catty aside. (Sorry ‘bout that!) Our tacit rival, Fidelity, has felt the pain. Some 50 percent larger than Vanguard at the turn of the century—by $250 billion—Fidelity now lags Vanguard by $650 billion. (Despite all of those intrusive and expensive “green path” commercials.)

(2) Widespread use of aggressive, higher-risk strategies, leading to less focus on long-term investment and more focus on short-term 6 This subject is one of the major themes of The Clash of the Cultures: Investment vs. Speculation, the book that I’ll be signing for each of you following this talk.

speculation. (3) The rise of “product proliferation” with thousands of new funds formed each year, embracing aggressive share distribution as integral to the manager’s interest in gathering assets and increasing fee revenues. (4) The conglomeratization of the mutual fund industry, a change that served the monetary interests of mutual fund managers and a disservice to the interests of mutual fund shareholders, and finally, (5) the triumph of the index fund, which did precisely the opposite; shareholders first, managers second. Let’s take a look at each of these changes. 1. The Stunning Growth of Mutual Fund Assets When I joined the industry in 1951, fund assets totaled just $3 billion7. Today, assets total $13 trillion, a remarkable 15 percent annual growth rate. When a small industry—dare I say a cottage industry?—becomes something like a behemoth, almost everything changes. “Big business,” as hard experience teaches us, represents not just a difference in degree from small business—simply more numbers to the left of the decimal point—but a difference in kind: More process, less human judgment. For the first half-century of industry history, equity funds were our backbone. Equity fund assets topped $56 billion in 1972, and then, after a great bear market, tumbled to $31 billion in 1974. Recovering with the long bull market that followed, equity assets soared to $4 trillion.

In February 2013 Premji transferred an additional 295.53 million Wipro shares, representing 12% of the company. Cumulatively he had by then donated over 521 million shares — 20.2% of Wipro's total shareholding — with a January 2015 valuation of about five billion dollars. The Giving Pledge signing and the share transfer together formalised the largest philanthropic commitment by any Indian up to that point.

assets, each with his or her own hopes and fears and financial goals. Isn’t that what managing other people’s money—a fiduciary duty—should be all about? “The Optimal Direction” Although the remarkable growth of this organization has earned us our position as first in the industry in investor trust and respect, Vanguard has become the firm that our competitors love to hate. Despite moving the industry in “the optimal direction” for investors—Dr. Samuelson’s words—not a single one of our competitors has changed its conflict-ridden structure to a mutual structure. Doing so, of course, would be ruinous to the wealth of their managers and their public shareholders, to say nothing of the detriment of the financial conglomerates that own them. (40 of the 50 largest fund complexes are publicly held; only 10 remain private.) But if the Vanguard example has so far failed to change the self-serving structure of the mutual fund industry, we have surely changed the industry at the margin. Those who have copied our strategies of indexing and bond fund management have had to at least pay lip service to cost-control, for the essential difference between funds tracking the same index is simply the difference in costs. (Obviously, low costs serve the fund investor; high costs serve the fund manager.) But a dramatic change is underway. Investors have begun to look after their own interests, as if by an invisible hand, they are improving the interests of society. Adam Smith strikes again!

Despite two subsequent bear markets (off some 50 percent, twice), equity fund assets have reached the $6 trillion level, still the engine that drives the industry. Exhibit 5. The data on balanced funds is sort of spasmodic; suffice it to say that their important role in the industry dwindled during the 1960s (reflecting the coming of the “Go-Go” era) and, after the bear market (being overwhelmed by the boom in bond funds). 7 OK. I recognize that $3 billion in 1951 would be equivalent to $28 billion in 2013 dollars.

Premji framed his broader conviction in the letter as the belief that markets, public systems and philanthropic initiatives all had a significant role to play in inclusive development, and that India needed to work purposefully toward a more humane, equitable and ethical society. The stance explicitly rejected a markets-only or state-only ideology in favour of a three-legged model.

Further, many commentators credit Vanguard for keeping downward pressure on excessive fees and other fund costs—the so-called “Vanguard effect”—staring down those who would make a bad situation worse. Exchange-traded funds (ETFs)—now itself a trillion dollar business—owe their very existence to Vanguard’s innovations in the burgeoning index fund field. Yes, ETFs are, in fact, index funds, with the “bonus” (to what avail?) of providing investors the ability to “trade the S&P 500 Index all day long, in real time” (as their early promotional ads said). But ETFs have in fact provided another no-load alternative for fund owners, a trend that is only now accelerating. The fact is that ETF portfolios have tiny turnover (a big plus, despite the huge turnover of their own shares among those aggressive, largely institutional investors who trade them).costs,

Mutual Fund Asset Growth 1951-2012 $2.5 $6.4 T $0.7 0.5 T $1.0 3.5 T $3.7 2.6 T 1,000 10,000 1951 1960 1970 1980 1990 2000 2012 Equity Balanced Bond Money Market $13.0 T $ billions 5. During the 1950s, assets of bond funds seemed stuck at around $500 million, with little growth during the next two decades. But, following the 1973-1974 bear market, bond funds began to assert themselves. As the financial markets changed, so did investors’ needs; income became a high priority. After that unpleasantness in the stock market, bond fund assets grew nicely, reaching $250 billion in 1987, actually exceeding the $175 billion total for equity funds. Bond funds then retreated to a less significant role during the 1990s. But today, following years of generous interest rates that were to tumble in recent years, bond fund assets have risen to $3.5 trillion, 25 percent of industry assets. As the dominance of equity funds waned, money market funds—the fund industry’s great innovation of the mid-1970s—bailed out the industry’s shrinking asset base. Exhibit 6. They quickly replaced stock funds as the prime driver. By 1981, money fund assets of $186 billion represented fully 77 percent(!) of industry assets. While that share has declined to 20 percent today, it is still a formidable business, with $2.6 trillion of assets. But given today’s pathetic yields and the possibility of a new business model for money funds (which will actually reflect their floating net asset values), it won’t be easy.

the ETF may well be a harbinger of lower costs of investing throughout the financial system. Look Out! Change is Coming. Innovation and the Financial System In our world today, praising innovation has become a commonplace. Why not? Looking back to the great innovations that changed our world—among others, the steam engine, the railroad, electricity, the telephone, the automobile, and most recently the computer, the iPad, and “the cloud” of our new information age. But it is more than the Luddite in me that compels me to throw my wooden boot into the wheels of financial innovation, which has, in general, ill-served investors. Here, I ally myself with one of our nation’s financial heroes, Paul Volcker, Princeton Class of 1949. He famously said that “the ATM is the only useful financial innovation of the past quarter-century.” (He recently told me that, if he’d been asked about the past half-century, he would have included the index fund.) And the iconic Warren Buffett—the most celebrated money manager of our age, who also praises the index fund—described all those innovative but highly risky derivative securities that now permeate our financial markets as “financial weapons of mass destruction, carrying dangers that . . . are potentially lethal.

Decision — Proposed Apple “iPrefs”; sued over bundled vote. Context: SDNY preliminary injunction Feb 22, 2013 (Judge Sullivan). Outcome (known): Apple withdrew Proposal 2; Cook’s “silly sideshow” retort documented.

” The fact is that in our modern era, the folly of short-term speculation has crowded out the wisdom of long-term investment,3 to the great benefit of Wall Street (the croupiers of our financial system) and to the great detriment of investors, too many of whom have become traders (the gamblers of the system). The dimensions of this shift are shocking. In my early days in this field, about 2 million shares of stocks were traded each day; in 2010 that number had soared to 13 billion shares. (Last year, it dropped to 8 billion shares, but it is still a staggering number.) 3 This change is the theme of my tenth book, The Clash of the Cultures: Investment vs. Speculation, John Wiley, 2012.

Mutual Fund Industry Share by Asset Class—1951-2012 6. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1951 1960 1970 1980 1990 2000 2012 Money Market Bond Balanced Equity 2012 Market Share 20% 100% With the rise of bond funds and money market funds, nearly all of the major fund managers—which for a half-century had primarily operated as professional investment managers for one or two equity funds —became business managers, offering a smorgasbord of investment options, financial department stores that focused heavily on administration and marketing. 2. The Sea Change in Equity Fund Management The growth and changing composition of the mutual fund asset base leads me to the second force in changing this industry culture. Over time, we have witnessed a sea change in the industry’s investment operations. The modus operandi of our equity funds, once supervised by conservative investment committees with a long-term focus and a culture of prudent investment—that original M.I.T. approach—gradually gave way to individual portfolio managers, often operating with a short-term focus and a more speculative culture of aggressive investing. This change from a group approach to an individual approach has fostered a surge in portfolio turnover. The turnover rate of the average active fund has leaped from the 30 percent

The traditional role of the financial system is to provide capital to new and existing businesses that seek to grow their profits by creating new and better products and services (and innovations!) But the capital raising function of finance is now dwarfed by rapid trading and rampant speculation. Just think about it: during the past five years, Wall Street has raised about $250 billion of equity capital from investors each year to fund these initiatives. But Wall Street has also been the aggressive abettor of share turnover—some $33 trillion per year. In other words, more than 99 percent of transactions simply represented trading pieces of paper with one another; less than 1 percent represented capital formation for future business growth. Let’s be clear on this: excessive trading subtracts value from investors as a group, shifting a large portion of investment returns to the coffers of Wall Street. I hardly need to emphasize to you that the leaders of our investment banking firms, hedge fund managers, and owners of mutual fund management companies remain among the highest-compensated people in our land . . . even after the role they played in bringing our financial system—and our nation’s economy (and the world’s)—to their knees. It’s a system that has to be changed, reformed, regulated, and made to function in the service of investors who put their capital to work in American industry. Look Out! Change Is Coming.

rate of the 1950s and early 1960s to the 140 percent rate of the past three decades.8 While most fund managers were once investors, they now seem to be speculators. The new financial culture of ever-higher trading activity in stocks was embraced by investors of all types. Then institutional traders, of course, were simply swapping shares with one another, with no net gain for their clients. What’s more, the old equity fund model of blue-chip stocks in market-like portfolios— and commensurately market-like performance (before costs, of course!)—evolved into a new, more aggressive model. The relative volatility of individual funds increased, measured in the modern era by “Beta,” the volatility of a fund’s asset value relative to the stock market as a whole. This increase in riskiness is easily measured. Exhibit 7. The volatility of equity fund returns increased sharply, from an average of 0.84 (16 percent less volatile than the market) in the 1950s to 1.11 during recent years (11 percent more volatile). That’s a 30 percent increase in the relative volatility of the average fund. In the earlier era, no equity fund had volatility above 1.11; during recent years, 38 percent of equity funds exceeded that level. Relative Volatility of Equity Mutual Funds Relative Volatility 1950-1956 2008-2011* Difference Over 1.11 0 % 38 % +38 % 0.95-1.11 34 38 +4 0.85-0.94 30 10 -20 0.70-0.84 36 6 -30 Below 0.70 0 9 +9 7. * *S&P 500 = 1.

00 **Sample of the Largest 200 Equity Funds * 8 Note: The turnover measures that I’m using represents the total portfolio purchases and sales of equity funds each year as a percentage of assets, not the traditional—if inexplicable—formula that is in general use today: the lesser of purchases and sales as a percentage of assets.

Quantitative Investing—An Example of Financial Innovation Few commentators seem to have noticed that the rise of speculation in the financial markets represents not just a difference in degree from its earlier form, but a difference in kind. Speculation has come to mean, not only the inevitable uncertainty surrounding a company’s profits or losses, its assets and liabilities, but the uncertainty surrounding the market price of its shares. The focus of the new market is less on business fundamentals, and more on the market valuation of a company’s shares . . . the expectations market. Decades before that baneful trend reached its full flower, legendary investor and author (The Intelligent Investor) Benjamin Graham warned about the rise in speculation. Here are some excerpts from his prescient 1958 keynote speech to The New York Society of Security Analysts—more than a half- century ago!

That shift toward higher volatility began during the “Go-Go Years” of the late 1960s, when “hot” managers were treated like Hollywood stars and marketed in the same fashion. It has largely continued ever since. (The creation of index funds was a rare and notable exception. An all-market index fund has Beta of 1.00.) But as the inevitable “reversion to the mean” in fund performance came into play, these aggressive manager stars proved more akin to comets— speculators who too often seem to soar into the sky and then flame out—focused on changes in short-term corporate earnings expectations, stock price momentum, and other quantitative measures. Too often, they forgot about prudence, due diligence, research, balance sheet analysis, and other old-fashioned notions of intrinsic value and long-term investing. With all the publicity focused on the success of these momentary stars, and the accompanying publicity about “the best” funds for the year or even the quarter, along with the huge fees and compensation paid to fund management companies and the huge compensation paid to fund portfolio managers of the “hot” funds, of course the manager culture changed. But even a short-term failing in performance became a career risk, so it became best to be agile and flexible, and watch over the portfolio in, as they say, “real time.” As equity fund assets soared, more aggressive funds proliferated, and steady and deliberate decision making was no longer the watchword.

In the past, the speculative elements of a common stock resided almost exclusively in the company itself; they were due to uncertainties, or fluctuating elements, or downright weaknesses in the industry, or the corporation’s individual setup . . . But in recent years a new and major element of speculation has been introduced into the common-stock arena from outside the companies . . .This attitude may be described in a phrase; primary emphasis upon future expectations. The concept of future prospects and particularly of continued growth in the future invites the application of formulas out of higher mathematics to establish the present value of the favored issues . . . Highly imprecise assumptions can be used to justify practically any value one wished, however high . . . a new kind of philosopher’s stone that can produce or justify any desired valuation for a really “good stock.” Mathematics is ordinarily considered as producing precise and dependable results; but in the stock market the more elaborate and abstruse the mathematics, the more uncertain and speculative are the conclusions we draw therefrom . . . Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience, and usually also to give to speculation the deceptive guise of investment.

Decision — BlackBerry: $4.7B LOI (failed) → $500M debentures → full exit. Context: Consortium LOI Sep 2013; debenture/preferred purchases; take-private never completed. Outcome (known): ~US$200M debenture interest income; full exit Aug 2026 (Globe & Mail).

As managers tried to earn their keep through feverish trading activity, portfolio turnover leaped upward, never mind that it seemed to improve fund performance only randomly, and because of advisory fees and trading costs couldn’t work for all managers as a group. For each winner there is a loser. 3. The Rise of “Product Proliferation” Closely linked to the change in the investment culture was the turn toward product proliferation. Such proliferation reflects a strategy for fund management companies that, in essence, says “We want to run enough different funds so that at least one will always do well.” It began to take hold in the fund industry in the Go-Go Years, but soared as the great bull market of 1982-2000 created ever higher investment expectations. The number of funds exploded. When I entered the industry in 1951, there were but 125 mutual funds, dominated by a few leaders.

So, the valuations of today’s stocks are based on guesses about the valuations that tomorrow’s market participants will place on a given corporation’s earnings. A battle of expectations. To make matters worse, earnings are increasingly subject to all sorts of manipulation and bias. An awesome gap has opened between the operating earnings of a company’s business and its reported earnings—reduced by the impact of “the bad stuff,” write-offs for all those mistakes and failures of earlier corporate activities. What’s more, to put a good face on earnings, even our corporate giants play games with the numbers. For example, most firms assume absurdly high future returns—in the 7 ½ to 8 percent range— for their pension funds. But when the bond portion of pension assets must take some investment risks even to earn a mere 3 percent, an 8 percent return simply is not in the cards. When reality comes home to roost (it is already starting to), funding that gap will place a substantial drag on future corporate earnings. In the short run, creative “financial engineering” can ameliorate or conceal these unpleasant situations. But in the long run reality, not expectations, will call the tune. “The fundamental things apply as time goes by.”

Decision — Led Eurobank/Greek bank rescue through recapitalization. Context: Largest-shareholder saga documented in ARs and FP coverage. Outcome (known): Recapitalization completed; Fairfax remains anchor shareholder.

More broadly, the management (or mis-management) of numbers is hardly the only instance of the dominance of numbers over reality in our society today.4 Our lives, as New York Times columnist David Brooks recently observed, “are now mediated through data-collecting computers.” Big Data, as it is called, “is really good at exposing when our intuitive view of reality is wrong . . . (giving us) wonderful ways to understand the present and the future.” Brooks continues . . . “Computer-driven data analysis excels at measuring the quantity of social interactions but not the quality. . . . Data creates bigger haystacks . . . many, many more statistically significant correlations, most of which are spurious and deceptive. The haystack gets bigger, but the needle we are looking for is still buried deep inside.”5 Worse, the trust that we place in numbers comes at the expense of trust in our own judgment and our values, and in our colleagues and communities. It’s bad enough when the focus on stock price over intrinsic value results in speculation and disrupts markets. But in the long run, business fundamentals trump market expectations that are based on current and expected numbers. When businesses rely too heavily on numbers, they tend to focus on the relatively predictable short run—on reported earnings and market expectations—than the far less predictable, but far more important, long run of creating durable intrinsic corporate value.

Today, the total number of equity funds comes to a staggering 5,091. Add to that another 2,262 bond funds and 595 money market funds, and there now are 7,948 traditional mutual funds, plus another 1,446 exchange-traded index funds (which are generally mutual funds themselves). It remains to be seen whether this quantum increase in investment options—ranging from the simple and prudent to the complex and absurd—will serve the interest of fund investors. I have my doubts, and so far the facts seem to back me up. The good news is that many of the new funds were bond funds and money market funds. The bad news is that in the equity fund sector of the industry, the massive proliferation of so many untested strategies (and often untested managers) have resulted in confusion for investors. “If you want to win, just pick the right fund or manager” they seem to say. But how could investors or their advisers possibly know in advance which funds or managers would win, and which would give rise to the expectation that it was easy to succeed and difficult to fail? The proliferation of fund “products” was followed (unsurprisingly!) by nearly all of today’s largest fund groups. Exhibit 8. It shows the number of funds that industry leaders offered in 1951. Nothing could make the amount of proliferation clearer than the quantum increase in the number of funds offered today. The ten largest firms offered as average of 1.7 funds in 1951; today, the top ten firms offer an average of 117 funds.

(Fidelity once managed just a single fund; the firm now manages 294 funds. Similarly, Vanguard also began the period with a single fund, and is now responsible for 140 funds. One can only trust that each member of the board of directors—in both cases—takes seriously his or her fiduciary duty to know and to understand each one of the scores of funds under the board’s aegis.)

Honestly, when management consultants utter their threadbare bromide, “If you can measure it, you can manage it,” I’d advise their clients to look elsewhere. When there is a gap between illusion and reality, it’s only a matter of time until reality takes over. Einstein got it right: “not every thing that counts can be counted, and not every thing that can be counted counts.” Our market participants, our business and government leaders, and our society at large must give heaviest weight to trust and integrity and commitment—which can’t be counted—rather than to all those minutiae that are so easy to count. When that spirit permeates our financial system, we will have taken an important step toward building a stronger economy. Financial Innovation and the Economy For it’s not just our financial system that is affected by the speculation that pervades our markets; it is our entire economy. For all the remarkable accomplishments of our economists, their vast research, 4 I present a more complete set of reflections on the flaws in today’s data-driven society in my 2011 book Don’t Count On It! The Perils of Numeracy (John Wiley 2011). The first chapter is based on my lecture of the same name, delivered at Princeton University Center for Economic Policy Studies on October 18, 2002. 5 My simple solution to the perils of picking stocks or money managers: Don’t look for the needle. Buy the haystack.

Number of Funds—1951 & Today 8. Original Name Total Assets (million) No. of Funds Managed Current Name Total Assets (billion) No. of Funds Managed M.I.T. $472 2 MFS $128 80 Investors Mutual 365 3 Columbia 162 116 Affiliated 209 3 Lord Abbett 97 38 Wellington 194 1 Vanguard 2,136 140 Eaton & Howard 90 2 Eaton Vance 107 139 Fidelity 64 1 Fidelity 1,372 294 Putnam 52 1 Putnam 59 76 American 27 2 American 994 33 T. Rowe Price 1 1 T. Rowe Price 375 106 Dreyfus 0.8 1 Dreyfus 228 152 Total/Average $1,475 1.7 Total/Average $5,658 117 2013 1951 Major Mutual Fund Groups Note: 12 of today’s 20 largest firms did not exist (or did not manage mutual funds) in 1951, including BlackRock, PIMCO, State Street Global, and JP Morgan With the rise of all of that product proliferation, the fund industry has come to suffer a rate of fund failures without precedent. Back in the 1960s, about 1 percent of funds disappeared each year, about 10 percent over the decade. By 2001-2012, however, the failure rate of funds had soared seven-fold, to 7 percent per year, during that entire period, 90 percent. With about 6,500 mutual funds, 5,500 have been liquidated or merged in other funds, almost always into members of the same fund family (with more imposing past records!) Assuming (as I do) that such a failure rate will persist over the coming decade, some 3,500 of today’s 5,000 equity funds will no longer exist—the death of more than one fund on every business day.

and the profound papers that they publish, I believe that too few of our economists—and to say nothing of our business leaders, our accountants and our market strategists—give enough attention to the symbiotic relationship between finance and economics. One of the few economists who took a strong interest in this interconnectivity was Hyman Minsky (1919 - 1996). In 1974, Minsky observed a fundamental characteristic of our economy that linked finance and economics: “The financial system swings between robustness and fragility, and these swings are an integral part of the process that generates business cycles.” Moreover, according to Minsky, the prevailing financial structure is a central determinant of the behavior of the capitalist economy. Likewise, the dynamism of profit-driven motives influence economic activity within the context of a given institutional structure in that the structure itself changes in response to profit seeking. Resonating to the ideas of economist Joseph A. Schumpeter, Minsky emphasized that “financial markets will not only respond to profit-driven demands of business leaders and individual investors but also as a result of the profit-seeking entrepreneurialism of financial firms. Nowhere are evolution, change, and Schumpeterian entrepreneurship more evident than in banking and finance, and nowhere is the drive for profits more clearly the factor making for change.

” The financial system takes on special significance in Minsky’s thesis, not only because finance exerts a strong influence on business activity, but also because this system is particularly open—or, as some might claim, prone—to innovation, as is abundantly evident today. Continues Minsky: ‘Since finance and industrial development are in a symbiotic relationship, financial evolution plays a crucial role in the dynamic patterns of the economy . . . stability creates instability.”6 The same theme was reiterated by Dr. William H. Janeway, Princeton Class of 1965, author and long-time adviser to Warburg Pincus. In his remarkable recent book on capitalism,7 he provides a masterful study of the historical and conceptual analysis of capitalism. Janeway’s theme, summarized by 6 The preceding three paragraphs are taken from the work of Frank K. Martin, author and founder of Martin Capital Management, as quoted in my book Don’t Count On It!. (John Wiley, 2011) 7 Doing Capitalism In The Innovation Economy, Cambridge University Press (2012).

While the mutual fund industry proudly posits that its mutual funds are designed for long-term investors, how can one invest for the long term in funds that may exist only for the short term? Another implication of proliferation is the extraordinary (and, again, truly absurd) rise in expense ratios. Just consider eight of the major fund managers of 1951 that survive today. Exhibit 9. Despite the quantum growth in the assets they manage, the expense ratios of their funds have soared—from an average of 0.62 percent of assets to 1.15 percent, or by 84 percent. (Note that four of the largest fee increases came in firms that were publicly-owned.) By contrast, the only mutually-owned firm (of course, Vanguard) actually drove expenses down from 0.55 percent to 0.17 percent, a drop in unit costs of fully 69 percent. Look.of

funds that operate under the original industry model rise by 84 percent, and the expense ratio of one fund group that operates under a new business model falls by 69 percent, it is at least possible that there’s a message there. Mutual Fund Expense Ratios 1951 & 2013 Percent of Assets Percent Change +220% +121% +108% +98% +65% +62% +53% +17% +84% -69% 0.42 0.56 0.64 0.66 0.63 0.50 0.75 0.84 0.62 0.55 1.33 1.23 1.32 1.31 1.04 0.81 1.14 0.98 1.15 0.17 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 MIT/MFS (c) Investors Mutual/Columbia (c) Eaton Howard/Eaton Vance (sh) Putnam (c) Fidelity (p) T. Rowe Price (sh) Affiliated/Lord Abbett (p) American (p) Average (ex. Vanguard) Wellington/Vanguard (m) Ownership Type: (c) conglomerate; (sh) public shareholders; (p) private; (m) mutual 9. The data in the chart are comprised of fund expense ratios unweighted by assets. While weighted ratios can only be approximated, one can conclude that the aggregate fees paid to these eight firms rose from $58 million in 1951 (measured in 2012 dollars) to $26 billion in 2013— more than a four-hundred fold jump in the cost of fund management. One might have hoped that all those dollars available to improve the quality of stock selection and investment strategy would have improved the returns earned by fund shareholders. Alas, there is no “brute evidence” whatsoever that such is the case. None. 4. The Conglomeratization of the Fund Industry April 7, 1958—A Date that will Live in Infamy.

New York University professor Nouriel Roubini, is the “Three Player Game between the state, private entrepreneurial innovation, and financial capitalism . . . The state has a key role in funding scientific research that leads to innovation. Amply funded by financial capitalism, innovation is a source of long- term growth. But speculative funding of innovation is also associated with asset and credit bubbles that end up in financial crashes. Then, following Keynes, the state has to intervene again to limit the economic and financial fallout from such crashes. (Janeway’s book) is a Minsky-inspired synthesis of the financial excesses of Schumpeterian creative destruction.” A Change of Heart8 Finance is a system that needs a change of heart. It will not be easy, given the age-old problems inherent in government regulation (never my favorite means of resolving complex business and economic issues), the powerful and hugely compensated lobbyists of K Street, and the determination of financial leaders to fight the regulations proposed under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The task of reform is a huge challenge, even before we consider our dysfunctional Congress. But we ought to be able to find agreement on a principle affirming that our money manager/agents have as their guiding star a solemn duty to serve their client/principals—a statutory federal standard of fiduciary duty for all managers of Other Peoples’ Money.

Advisers must be required to put the interest of clients first; focus on long-term investing rather than short-term speculation; minimize investment costs; observe the rights and responsibilities of stock ownership; and be free from the massive conflicts of interest that permeate our financial system today. Even that small step will take time. Until then, we’ll have to rely on what I call “the Adam Smith solution.” If we investors will simply cut away all the confusing complexities and hyperactivity that characterize today’s financial system and focus on our own best interests, select managers and advisers who best personify the tenets of fiduciary duty, and move our investments away from those who don’t meet that standard, the system will change. What will emerge—what must emerge—is a system that involves far less speculation, less trading, more reasonable fees and costs, and surely less of the misguided confidence that each one of us is smarter than our fellow investors—a logical contradiction. Once again, I call this the Adam Smith solution because of his timeless insight: 8 This turn of phrase allows me to brag (again). For this very day marks the 17th anniversary of the heart transplant that I received on February 21, 1996.

with an unfortunate decision by the U.S. Court of Appeals, Ninth Circuit (in San Francisco) that affirmed the right of a fund adviser (Insurance Securities Incorporated, or ISI) to sell a controlling interest in its stock at a premium to its book value. The SEC argued that the transaction was a sale of fiduciary office, and hence a violation of fiduciary duty. The date of that decision, April 7, 1958, then, was a date that will live in infamy. That seminal event, now long forgotten, changed the rules of the game. It opened the floodgates to public ownership of management companies; providing the huge rewards of entrepreneurship to fund managers, inevitably at the expense of fund shareholders. From 1924 through the 1950s, as I recall, every single one of the industry’s largest fund management companies was managed primarily by investment professionals, either a partnership or a closely-held corporation. But within a decade after the District Court’s decision, scores of mutual fund management companies would go public, selling their shares (but usually retaining voting control). It was only a matter of time until U.S. and international financial conglomerates acquired most of these newly publicly-owned firms, and many of the industry’s privately-owned firms as well. These acquiring firms, obviously (one could even concede, appropriately), are in business to earn a high return on their capital, and they looked at the burgeoning fund industry as a goldmine for managers. (It was!)

But that high return came at the expense of the return on the capital entrusted to them by the mutual fund investors that they were duty bound to serve. The dimension of that change has been extraordinary. Exhibit 10. Among today’s 50 largest mutual fund complexes, only nine remain private. 40 are publicly held, including 30 owned by financial conglomerates. The only different ownership model is the single mutual mutual fund structure—Vanguard’s— in which the fund management company is owned by the fund shareholders. All of the public fund management companies have external owners, and obviously face a potential conflict of interest. As I spoke to Wellington’s officers in 1971 (when our firm had public shareholders): I reveal an ancient prejudice of mine: All things considered . . . it is undesirable for professional enterprises to have public stockholders . . . The pressure for earnings and earnings growth engendered by public ownership is antithetical to the responsible operation of a professional organization.

Every individual intends only his own security, and directs his industry [read “capital”] in such a manner as to produce its greatest value. He intends only his own gain, and, without knowing it, is led by an invisible hand to advance the interests of society. A Few (More!) Insights from a Long Career This final subject of my lecture this afternoon is to provide, as the Gilbert Lecture suggests, some insights that I have gained during my career. These will be brief (and pungent), for I would not presume that those considering a career in finance will be interested in my own career path. So I’ll close with some advice that, I believe, could well apply to anyone in any career. First, simply put, what I’ve learned is not very complicated: 1. Think for yourself. Find reinforcement in the readings of those who agree with you, but don’t forget to give even more heed to those who disagree. (Who really knows? They might be right.) 2. Use your God-given (and Princeton-enhanced) brain; keep thinking; keep challenging; keep reading; and if you’re going to take “the road less traveled by,” do so only after you’ve walked around a problem and observed its possible solutions from all perspectives. “Knowledge is power.” 3. A professional is one who seeks to put his or her client’s interests first, while the businessman (or woman) merely seeks to maximize profit. Put your professional instincts ahead of your business instincts.

Ownership of 50 Largest Mutual Fund Management Companies, 2012 Manager Owned (9) plus Mutual (1) Publicly Owned Conglomerate Total Firms with Public Ownership: 40 10. Despite the far-reaching consequences of its unfortunate birth, “conglomeratization” has been the least recognized of all of the changes that have beset the mutual fund industry. Financial conglomerates now own about two-thirds of the major fund management companies, and with the publicly-traded firms, more than 80 percent. However, for whatever one wants to make of it, each of today’s three largest fund complexes—Vanguard, Fidelity, and American Funds—has remained independent. These three firms alone manage $4 trillion, or some 30 percent of all mutual fund assets. While the private firms largely have grown organically, many of the public firms have grown by acquisition, a pattern hardly unfamiliar to the business behemoths of Corporate America. For example, The Amerprise/Columbia Funds have acquired fully a dozen previously independent fund managers. BlackRock obtained substantially all of its fund asset base through its acquisition of Barclays Global Investors in 2009, acquiring Merrill Lynch Asset Management in 2006, and its even earlier acquisition of State Street Management and Research Corporation previously owned by Met Life. (That acquisition was followed by the demise of industry pioneer State Street Investment Corporation, from my perspective a “death in the family.

Remember to put the interest of your clients ahead of your own self-serving goals. (We all have self-serving goals; the question is where they stand in the hierarchy of our values.) 4. At least in the field of finance, never create anything solely for marketing reasons. “The crowd is always wrong.” Capitalizing on the fads and fashions of the day will, finally, serve your employers while hurting your clients. In my own career, I’ve made scores of mistakes—some major—but almost every bad decision I made came from placing “marketing” at the top of my priority list. I regret every one of them. 5. Never let your determination falter. Even when the world turns against you and ridicules your ideas, “Press on Regardless.but

So yes, opening the doors to public ownership produced exactly what the SEC was worried about a half-century ago in the ISI Case: “Trafficking” in management contracts, and the likelihood that it would dramatically erode the sense of fiduciary duty that largely characterized the industry during its early era. And product proliferation hardly helped. So I reiterate: How can an independent fund director feel a fiduciary duty to the hundreds of fund boards on which he or she serves? What’s the problem? It’s summarized in Matthew 6:24: “No man can serve two masters.” Yet when a management firms is owned by a giant conglomerate (or even by public owners), the conflict of interest is palpable. When a conglomerate buys (or builds internally) a fund management company, the acquirer’s goal is to earn the highest possible return on that capital. That’s American way! The idea: maximize fees by gathering assets and creating new products, and resist reductions in fee rates that would enable fund shareholders to benefit from the economies of scale. But fund shareholders, of course, would benefit from lower fee rates, which would increase their returns, dollar for dollar. Think of it this way: the officers and directors of financial conglomerates have a fiduciary duty to increase the returns earned by their corporate shareholders; they also have a fiduciary duty to increase returns to their mutual fund shareholders.

without Persistence and Passion (PQ), and unrelenting Curiosity (CQ), brains won’t be enough.9 6. Above all, never lose your idealism. Most young collegians are idealistic, and during my four years at Princeton, I was surely no exception. But in all that followed, my idealism helped me through so many setbacks, and more times of sadness, disappointment, and frustration than you could ever imagine. But that idealism has never faltered, and is stronger than ever today. There’s still plenty of work to be done by all of us to build a better world. But a caution: Don’t give too much credence to my insights. You’re not me, and I’m not you. The really amazing concatenation of luck, ideas, events, great mentors, and timing (always!) that resulted in Vanguard will never be repeated in any other context. Since you are you—and that’s good!—what’s to be said? To find your role in life, you must “come to yourself,” which happens to be the subject of a lengthy 1901 essay by Woodrow Wilson, Princeton Class of 1879, President of Princeton University, Governor of the state of New Jersey, and President of the United States of America. Bear with me as I close with these compelling excerpts from When a Man Comes to Himself10: . . . It is in real truth that common life of mutual helpfulness, stimulation, and contest which gives leave and opportunity to the individual life makes coming to yourself possible, makes it full and complete . . .

As Matthew suggested, this obvious conflict in serving two masters will cause them “to love the one and hate the other,” and I think that this audience knows which master gets the love. There can be only one resolution to the conflict: a federal policy that prohibits the ownership of fund managers by holding companies. 5. The Triumph of Indexing December 31, 1975 – A Date that will Live in Infamy. Part II If April 7, 1958 is “a date that will live in infamy” for mutual fund shareholders, then surely December 31, 1975, is a date that will live in infamy for mutual fund managers.than

In discovering your own place and force, if you seek intelligently and with eyes that see, you find more than ease of spirit and scope for your mind. You find yourself, as if mists had cleared away about you and you know at last your neighborhood among people and tasks. To most human beings, coming to oneself is a slow process of experience, a little at each stage of life. A collegian feels the first shock of it at graduation, when the youth’s life has been lived out and the adult’s life begins. You have measured yourself with other youth . . . but what the world expects of you have yet to find out, and it works, when you discover it, a veritable revolution in 9 These “Qs” are a slight variation on Thomas Friedman’s formulation in a New York Times opinion piece on January 29, 2013. 10 I’ve taken the liberty in substituting today’s so-called “inclusive” language in these quotations, changing Wilson’s male-focused nouns and pronouns. President Wilson’s essay can be found in its entirety at www2.hn.psu.edu/faculty/jmanis/poldocs/Man-Comes-Himself.pdf

seven months earlier—filed with the State of Delaware the Declaration of Trust for a new mutual fund that promised not to engage in the practice of active management. Originally named “First Index Investment Trust,” it was the world’s first index mutual fund. Its birth was, curiously, the product of a divorce. (Now there’s a paradox!) In 1966, as head of the long-established Wellington Management Company, I bet the firm’s future on a Boston firm—Thorndike, Doran, Paine, and Lewis—run by four aggressive equity managers operating a hot “Go-Go” fund named Ivest, managing a growing pension business, and having investment talent that, I believed, could more effectively manage the portfolio of our faltering Wellington Fund. Yes, I was young and foolish, and (even worse!) I was wrong. But for a time, the merged firm prospered, yet only until the “Go-Go” era came to its inevitable end. As 1973 began, the stock market began its terrible 50 percent crash, even worse for Ivest Fund, which never did recover. (It no longer exists.) Worse, Wellington Fund performance was also a disaster—the worst performing of all balanced funds in 1967-1977. Our new business model faltered, and then failed. In the merger, I had ceded substantial voting power to the new managers, and it was they who fired me as the leader of Wellington Management. On January 24, 1974, I was replaced by their leader, Robert W. Doran. I leave it to wiser heads than mine to explain the perverse logic involved in that outcome.

your ways of thought and action, your training was not for ornament or personal gratification, but to . . . serve the world and satisfy yourself. Then, indeed, have you come to yourself . . . . Surely you have come to yourself only when you have found the best that is in you, and you have satisfied your heart with the highest achievement you are fit for. It is only then that you know of what you are capable and what your heart demands . . . No thoughtful person ever came to the end of their life, and had time and a little space of calm from which to look back upon it, who did not know and acknowledge that it was what you had done unselfishly and for others, and nothing else, that satisfied you in the retrospect, and made you feel that you had played as a human being. Frederick Buechner, noted author and churchman, and a member of Princeton’s Class of 1947, put it far more succinctly: To live is to experience all sorts of things. It would be a shame to experience them—these rich experiences of sadness and happiness and success and failure—and then have it just all vanish, like a dream when you wake up. Pay attention to your life. To that final sentence, I can add absolutely nothing. Pay attention to your life. Good luck to you all.

But I know that it was the most heartbreaking moment—actually the only such moment—of my entire career. I decided to fight back. Fired by Wellington Management Company—actually “fired with enthusiasm”—I continued my role as chairman of the board of Wellington Fund and its eleven sister funds. There was some overlap in board membership between the funds and the manager, but the funds, as required by law, had a majority of independent directors. As far as I know, such a power struggle, if you will, had never before occurred in our industry, and I doubt that it will ever occur again. That’s too long and complex a story for today. (For more detail, it’s chronicled in The Clash of the Cultures.)couldn’t

figure out. In the first edition of the newspaper on March 14, 1967, the Times reported that this “ex-Fund Chief” would “fight his way back.” But in the next edition, it added a question mark. Exhibit 11. In essence, what finally happened six months later was that the fund board, in a King-Solomon-like decision, decided to cut the baby in half (more or less). “Boston” would continue as investment adviser to and distributor of the funds. “Philadelphia,” under my direction, took on the responsibility of running the funds’ administrative, accounting, record- keeping, and compliance activities, as well as the responsibility for evaluating the performance of our adviser and distributor (then, of course, Wellington Management Company). 11. For the first time in industry history, mutual funds would be independent of their management company, free to operate solely in the interests of their own shareholders. The fund board accepted my recommendation to operate as a truly “mutual” organization, with the new firm owned by the funds themselves and providing its services to shareholders on an “at-cost” basis. In yet another contentious vote during the long process in making our decision, the board also approved my choice of a name for the new firm: Vanguard. “The Vanguard Group of

Investment Companies” was born on September 24, 1974.9 As I took on my new job, I was once again, “fired with enthusiasm.” (Again! Think about that!) Recalling the analysis of the fund industry that I had presented in my senior thesis, and buttressed by my research data (in those days, using a hand calculator and a slide rule), I documented the failure of mutual fund managers generally to gain “superiority over the market averages” (using the Standard & Poor’s 500 Index) during the previous three decades. Equally important, I was inspired by powerful encouragement from Nobel Laureate Paul Samuelson. Result: We formed the world’s first index mutual fund. Our board was skeptical, for its mandate to the warring partners precluded Vanguard from providing investment advisory services to the funds. But when I explained that an index fund required no adviser, the board reluctantly acceded to my recommendation. That day of infamy for mutual fund managers “changed a basic industry in the optimal direction,” as Dr. Samuelson wrote in his 1993 foreword to my first book.10 It was the beginning of a far better direction, one aimed at placing front and center the interests of the mutual fund shareholders. The IPO for our index fund took place on August 28, 1976. It was a flop. The underwriters raised only $11 million of initial assets. It barely grew for years, and industry leaders scorned it publicly.

(“You wouldn’t settle for an ‘average’ brain surgeon, so why would you settle for an ‘average’ mutual fund?”)11 A midwest brokerage firm flooded Wall Street with posters screaming “INDEX FUNDS ARE UN-AMERICAN. Help Stamp Out Index Funds!” Exhibit 12. 9 One could easily argue that “the date that will live in infamy” for fund managers was Vanguard’s precedent- breaking formation on September 24, 1974. For it replaced the industry’s business model with a truly mutual model that was virtually essential to the creation of our index fund. More about that later. 10 Bogle on Mutual Funds, John Wiley & Sons, 1993. 11 Fidelity’s Chairman Edward C. Johnson III doubted Fidelity would follow Vanguard’s lead. “I can’t believe,” he told the press, “that the great mass of investors are [sic] going to be satisfied with just receiving average returns. The name of the game is to be the best.” Fidelity now oversees $126 billion of index fund assets.

12. To make matters worse, during the index fund’s early years it appeared to lag the returns of the average fund manager (largely because of flaws in the data). The fund attracted few additional assets. Even with the acquisition of a $40 million actively-managed Vanguard fund, First Index didn’t cross the $100 million mark until 1982.12 Indeed, it wasn’t until 1984 that a second index mutual fund joined the industry. By 1990, total assets of, by then, five index funds reached $4.5 billion, only about 2 percent of equity fund assets. Exhibit 13. The experiment in indexing was stumbling. Growth in Assets of Equity Funds— Active vs. Index 13. 1,000 10,000 100,000 1,000,000 10,000,000 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Active Index $39 billion $14 million $1.9 trillion $167 billion $590 million $1.5 trillion $84 billion $4.8 trillion $900 billion $ millions $5.1 trillion Annual Growth Rate Active Funds: 14.4% Index Funds: 38.4% Net Cash Flow, 2008-April 2013 Active Funds: -$386 billion Index Funds: +$667 billion 12 In 1980, the Trust’s name was changed to Vanguard 500 Index Fund.

But as Thomas Paine reminded us all those years ago, “the harder the conflict, the more glorious the triumph.” And just as Paul Samuelson predicted, indexing changed the fund industry in the optimal direction. Index fund assets leaped to $100 billion by 1996, and to $1 trillion by 2006, and to more than $2 trillion today. So, no, I don’t think that the word triumph in the subtitle of this section is hyperbolic. Consider that during the past five years, investors have liquidated some $386 billion of their actively-managed equity funds and poured $667 billion into passively-managed index equity funds—a $1 trillion-plus shift in investor preferences. Today, assets of passively-managed equity index funds are equal to almost 40 percent of the assets of their actively-managed peers, their superiority confirmed by scores—perhaps hundreds—of independent academic studies, and denied by none. Index fund growth seems certain to continue, and likely even accelerate, even from today’s massive total. “The Moral History of U.S. Business” The polar nature of those two days of infamy—one in 1958 and one in 1975—the first placing a heavy burden of costs on the returns earned by mutual fund investors, the second an automatic boost in the returns that they earn—can be said, I think, carry a subtle lesson for fund investors and their managers. For the first reflects a diminution of the power of the fiduciary, the second reflects a clear buttressing of the concept of fiduciary duty.

Could there be a lesson here about financial ethics and stewardship? Are the morals of our financial system involved? Will our society demand that business success be harmonized with moral purpose? Ironically, that provocative question was raised in that very December 1949 issue of FORTUNE in which “Big Money in Boston” appeared. The lengthy essay was entitled, “The Moral History of U.S. Business.” Exhibit 14. American business leaders, the article noted, “do not work for money alone. A dozen nonprofit motives lie behind their labors: love of power or prestige, altruism, pugnacity, patriotism, the hope of being remembered through a product or institution, etc. American business leaders in general have offered few pure specimens of economic man . . . “It is relevant to ask,” FORTUNE added, “what are the leader’s moral credentials for the social power he wields.”

14. The essay presented a brief history of the values of business leaders, beginning in Colonial America. Here we meet Benjamin Franklin,13 who looked upon his business as the foundation of all else he did. He set himself a course of conduct; using his favorite words, “industry and frugality,” which he described as “the means of producing wealth, and thereby securing virtue.” FORTUNE also cited: . . . the generic features of the businessman of that era, as described in Lives of American Merchants in 1844. Speaking of William Parsons, a New Yorker of probity, the book declared: “the good merchant is not in haste to be rich . . . He recollects that he is not merely a merchant, but a man, and that he has a mind to improve, a heart to cultivate,14 a character to form. The good merchant, through an enterprising man and willing to run some risks, yet is not willing to risk everything, nor put all on the hazard of a single throw . . . Above all, he makes it a matter of conscience not to risk in hazardous enterprises the property of others entrusted to his keeping . . . He is careful to indulge in 13 Paradoxically, he began his life in Boston, but lived in Philadelphia and spent his entire career there. 14 As some in this audience know, I was the beneficiary of a heart transplant in 1996, so I’ve been cultivating a new heart for the past 17 years.

no extravagance, and to live within his means . . . Simple in his manner and unostentatious in his habits of life, he abstains from all frivolities and foolish expenditures . . . It is this spirit of rectitude, I hope, that will again come to animate the values and conduct of our industry. Wrapping Up Yes, six-plus decades after I read that FORTUNE article, there’s still “Big Money in Boston” today. While no longer the center of the industry, Boston firms manage about $2.2 trillion of industry assets or 18 percent, well down from that 1951 peak of a dominant 46 percent. Exhibit 15. Whether we like it or not, there have been some significant changes, not only in the center of the industry’s core, but in the business model of many firms. First, the old M.I.T. is no longer the embodiment of pure trusteeship, bereft of a marketing agent for the fund. In 1969 it became the nucleus of a new privately-owned fund complex (Massachusetts Financial Service) whose funds were managed and distributed by a profit-seeking firm. More than incidentally, in 1976 MFS was purchased from its fairly new owners by a publicly-owned Canadian insurance company. The firm’s one-time market share of 14 percent of industry assets is now 4 percent. Since 1995 alone, Sun Life has earned almost $4 billion of profits from its ownership of MFS, a goldmine, as I mentioned earlier, for the financial conglomerate. (MFS was put up for sale in 2007, but “after a strategic review,” Sun Life decided not to sell.)

Boston Still Huge, But No Longer Dominant* Boston 46% Other 7% Minneapolis 13% Philadelphia 7% New York 27% Boston 18% New York 21% Philadelphia 18% Other 23% Los Angeles 14% San Francisco 6% 1951 2013 15. *Percentage of mutual fund assets by location of firm headquarters. Similarly, staunch old Putnam Management Company was bought from its manager/trustees by U.S. insurance giant Marsh and McLennan in 1970, and resold in 2008, for almost $4 billion, to yet another Canadian conglomerate. Its fund assets have stumbled from $250 billion in 1999 to $60 billion today. You decide whether or not the SEC conclusion about the onset of trafficking in management contracts was justified! The change in the business model of M.I.T.—that old exemplar of Puritan Boston—left a void that was filled by Vanguard—in Quaker Philadelphia. The vaguely accidental creation of Vanguard’s index fund has been the prime force in its rise to industry’s largest firm. Now overseeing $2.2 trillion of assets, the firm’s remarkable growth is a reflection of the triumph of indexing and of the pervasive realization that lower fund costs lead to higher fund returns. Vanguard’s share of industry assets has set an all time industry high of 15 percent. Since 2010 the firm has accounted for more than 70 percent of industry cash flows. (Don’t worry, that share will surely decline.) But it seems only a matter of time until a serious challenger emerges.

The challenge is simple: just manage more index funds, and operate at far lower costs. But, given the priority of building earnings for the public stockholders of so many management companies, it won’t be easy.

But I wish all of our fund peers well—especially those in Boston, the industry’s birthplace. And I wish all of you here today success in following the central principle that has informed my long career. It all began with the incredible good luck—against all odds—of stumbling upon that 1949 story that began on page 116 in FORTUNE magazine, “Big Money in Boston.” That principle inspired my Princeton thesis, where I concluded, “The principal role of the investment company should be to serve its shareholders.” That principle should become the watchword of our industry in all the years ahead.

Decision — Final letter: recommended partners simply hold Amazon, Costco and Berkshire; wound up the fund. Context: Verified verbatim in the IGY postamble; liquidation completed early 2014. Outcome (known): 921.1% cumulative / 18.4% p.a. after fees (FT) over 12 years.