True giants of the investment world: Buffett, Templeton, Booth, Bogle, Swensen
February 16, 2019
The true giants of the investment world What Buffett, Bogle, Booth, Templeton, and Swensen have in common
There are many famous investors around the world who have achieved great returns, or made it big by betting it right during the financial crisis, or have gained notoriety through lavish billionaire living habits.
Heck, there’s even a TV series called “Billions” about one of them.
But there are a few good men over the past century (yes century not decades), who we can call the true giants of the investment world. They didn’t just make a lot of money for themselves; they made a deep lasting impact on future generations of investors because of the contributions they made to the industry and to the broader society.
Through their investment methods and companies, they fundamentally changed the way we think, invest, grow and preserve wealth. They have also influenced and inspired Endowus to be who we are. We stand on their shoulders.
Jack Bogle, founder of The Vanguard Group, passed away last month. He is a legendary figure in the investment world and a true giant of the industry, revolutionising the way individuals and institutions will invest forever. In tribute, we wanted to highlight his impact and that of the true giants of the investment world:
Warren Buffett (born 1930) "Investors should remember that excitement and expenses are their enemies.”
When people talk about great investors, the first name that rolls off their tongues is often Warren Buffett. The fact that he was for a long time the richest man on earth contributed to this revered position. Now ranked third in the world with a net worth of US$84.4 billion as of November 2018, Buffett has already cemented his position as one of the greatest stock pickers of all-time with his many investments through Berkshire Hathaway. The diversified holding company, that encapsulates the best of value investing, and the marriage of private and public markets investing, has risen on average more than 20% per year for a total gain of over 2,400,000%. For reference, the S&P 500 had an annualised return of 9.9% over the same period, for a total gain of 15,508% including dividends.
Now 88 years old and counting, he famously pledged that he will give away 99% of his total fortune to philanthropic causes. His excellence in performance is matched by his generosity and his conspicuous frugality. Interestingly, while he attributes his investing framework and philosophy to Benjamin Graham (the father of value investing), he became a major advocate of low-cost index funds later in life. He made a well publicised million dollar bet for charity with some hedge fund managers who he beat hands down by just investing in a passive market index fund. He believed (and was proven right) that a low-cost way to track broad, diversified stock market returns would outperform high-cost actively managed funds. Thus re-emphasizing the simplest of truths often forgotten in investing - lower cost directly leads to higher returns, and it compounds over time.
John Templeton (1912-2008) “Never forget: the secret of creating riches for oneself is to create them for others.”
Although from another generation, another name that is often mentioned in the same breath is Sir John Templeton, who Money magazine named “arguably the greatest global stock picker of the century”. He is a more traditional contrarian investor and made his name in the 1930s when he famously bought every stock under $1 during the Great Depression and again during World War II. Needless to say, those investments turned out pretty well, demonstrating the success of being diversified, and staying invested at times of extreme pessimism.
He entered the mutual fund industry in 1959 and founded Franklin Templeton, a leading global fund management house. By mutualizing his funds, he allowed a broad base of retail investors access to his and his team’s investment expertise and superior returns. Others who have made such an impact on the development of the mutual fund industry during the last century include the likes of Jon Lovelace at Capital Group, Ned Johnson at Fidelity, Thomas Rowe Price at T. Rowe Price, and Walter Morgan at Wellington who Jack Bogle worked for before he left and founded The Vanguard Group.
Sir John and his company, Franklin Templeton, became synonymous in the industry with fundamental investing, value investing, and emerging markets investing. Sir John passed away in 2008, but his legacy lives on through his company and his generous donations. Sir Templeton was a multi-billionaire but was also one of the most generous philanthropists in history, giving away over US$1 billion to charitable causes during his life, and setting up important foundations and awards for future generations.
David Swensen (born 1954) “If you pursue the sensible long-term policy, look at it over a 5- to 10-year period. Don’t look at five months.”
A name that may not be so well known by the general public is David Swensen, the Chief Investment Officer of Yale Endowment who took over the university endowment in 1985. He has generated an annualized returns of over 12% over the past 30 years, growing the endowment’s money by over 34x.
He invested by applying a type of modern portfolio theory now known commonly in the investing world as the “Endowment” (or “Yale”) Model or the “Swensen Approach”. It is a systematic and diversified asset allocation methodology that is now widely adopted by asset allocators around the world. What really stands out in his approach was how he embraced diversified asset allocation methodologies and invested in global markets, alternative assets classes, illiquid investments such as private equity, as well as low-cost index funds.
The name “Endowus” originally came from our desire to provide this type of sophisticated endowment-style asset allocation to all of us, the individual investor. We do this by accessing institutional quality products at institutional costs, just as a university endowment, sovereign wealth fund or major pension fund would be able to do.
He was a big critic of the high and excessive fees of mutual funds, which limited the ability to generate good returns for their investors. In his book, “Unconventional Success: A Fundamental Approach to Individual Investing”, he confesses that he did not fully appreciate how difficult it might be to replicate the Yale model at the level of individual investors, and argues that the for-profit mutual fund industry consistently fails the average investor. From excessive management fees to the frequent "churning" of portfolios, the relentless pursuit of profits by asset management companies harms individuals. Instead, he advocates for a contrarian investment alternative that promotes well-diversified, equity-oriented, "market-mimicking" portfolios that reward investors who exhibit the courage to stay the course. Swensen suggests implementing his nonconformist proposal with investor-friendly mutual funds and passive investments.
David Booth (born 1946) “The number of managers that can successfully pick stocks are fewer than you’d expect by chance. So, why even play that game? You don’t need to.”
In 2008, The University of Chicago Graduate School of Business received the largest donation to a school to that date, US$300 million. In honour of the donor, the school was renamed the Booth School of Business. The donation was made by alumni David Booth, the founder and Chairman of Dimensional Fund Advisors (DFA).
Dimensional was founded in 1981 and currently has over US$500 billion in assets under management. Unlike other asset managers, it surprisingly did not have net withdrawals during the financial crisis of 2008 or the dot-com bubble in 2001.
The company is founded on the idea of implementing the great ideas in finance for its clients and boasts many distinguished academics and Nobel Laureates, such as Eugene Fama, Kenneth French, Robert Merton, and Myron Scholes as its advisors or directors. Embracing the efficient market hypothesis and the belief in the power of markets, DFA adopts a systematic and evidence-based approach to investing—an approach that the company can implement consistently and investors can understand and stick with, even in challenging market environments.
Dimensional utilises the proven factors of returns that are persistent, pervasive, and can be harvested in a cost-efficient manner. DFA pioneered the factor-based investment model almost 40 years ago - the industry is playing catch-up, with the recent proliferation of “smart beta” investing.
Endowus is aligned with DFA in pursuing an evidence-based approach to investing. Instead of trying to time the market, we focus on the science and empirical evidence that is rational and allows for a higher probability of outperformance over time. While these factors may not exhibit themselves through outperformance of the benchmarks year on year, over time the proven factors of returns (value, small, profitability) will assert themselves and lead to better performance.
We must take a broadly diversified position in the markets for the long-term in order to capture the full benefits of factor-based investing.
Despite Booth’s large donation to the University of Chicago and other philanthropic efforts over the years, he is still a billionaire but remains down to earth and out of the limelight. Dimensional remains humble with the same mission as when it was started in David’s apartment 38 years ago.
Dimensional famously never gives rebates or trailer fees to distributors, such as banks or brokers for selling its products. This not only keeps fees lower for investors like you and me, but it also ensures that its products are not being sold by distributors with misaligned incentives. Just like Vanguard, they believe upfront sales charges and hidden fees lead to misalignment of interest and errant behaviour by financial institutions who will try to maximize their own returns at the expense of their client’s returns, by taking higher fees from individual investors.
Endowus is a firm believer in keeping costs as low as possible and working with fund management companies that share our philosophies and values, such as Dimensional.
David Booth (second from left) with the Endowus team, Dec 2018
Jack Bogle (1929-2019) “The miracle of compounding returns has been overwhelmed by the tyranny of compounding costs.”
Today’s note is completed by a hero of the investment industry, the late Jack Bogle, founder of Vanguard.
Vanguard pioneered the “index”, “tracker” or “passive” fund. Bogle’s conviction was based on empirical data that most investors cannot consistently beat the market over the long-term. We would do better buying and holding a low-cost fund that gives us exposure to the total market return, rather than succumbing to emotional impulses or biases in a futile effort to beat the market.
The concept of index funds is attributable to Professor Samuelson, from whom Jack got the idea to start Vanguard and passive investment products. When Bogle established Vanguard in 1975, he created a unique structure called mutualization so the company is owned by its fund investors, cutting out fees from the middlemen. He effectively set it up as a nonprofit with no outside shareholders. Removing the accrual of profits to the parent fund management company allowed a further lowering of cost for all, directly benefiting all individual investors who invested through Vanguard.
Warren Buffet famously said:
"If a statue is ever erected to honour the person who has done the most for American investors, the hands-down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds.
In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing of added value. In his early years, Jack was frequently mocked by the investment management industry.
Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me."
It is incredible that Jack never tried to amass a personal fortune or pursue a family legacy, as so many in the finance industry did and still do. Vanguard is truly the most value-driven company in the industry and a benchmark for all who seek to do good in the investment industry. Thank you, Jack, for your courage in pioneering a new way for the industry and for the contributions to all of us. May you rest in peace.
Conclusion By learning from these great thinkers and practitioners, we can bring together the best of Swensen’s asset allocation methodologies, remove unnecessary market timing like Buffett, provide unique access to the individual investors through the mutualization of fund investing like Templeton or Bogle, and rely on scientific evidence and empirical data backed up by sound academic rigor like Booth.
Endowus seeks to stand on the shoulders of these giants. There is no need to reinvent the wheel or try to do things we know just do not work over the long-term, such as trying to outperform markets through timing or stock picking.
All these men worked hard to give back intellectually through their investment acumen and efforts to find new, more effective ways of investing, especially for the individual investor. They have also given back financially through innovative ways to share the overall pie or by sharing their wealth directly through philanthropic efforts and donations.
Endowus shares the same values and philosophies and is strategic in our relationship with many of the companies associated with these leaders. We provide individual investors access to the best investment products for each asset class, but we are agnostic to the types of products we use. Whether they are funds or ETFs, whether they are passive or smart beta factor strategies.
We focus on evidence-based, systematic investing through diversified asset allocation and sophisticated fund selection. We are not beholden to anyone as an independent advisor, as nobody pays us other than our clients. Any rebates or fees we receive from fund producers will go back to our investors and will not be kept by us. Above board and transparent in all our ways, and always aligned to the best interest of our clients.
Like Jack, we may forgo some of the economic upsides as a company. However, our mission is to level the playing field and allow the individual investors a greater chance of achieving meaningful long-term returns that major institutions and the best investors in the world have been able to generate.
This thereby allows all of us to have a better chance of reaching our important personal financial goals, whether it is for our children’s college funds or retirement income. We are constantly striving to narrow the gap that exists currently between the individual and institutional investors, using technology and innovative ways to access sophisticated products and bring down costs.
This is also how we plan to further the legacies of these true giants of the investment world, who have inspired us to be who we are.