The Unsung Heroes of Investing
Ask an Average Joe with no more than a passing interest in markets to name a famous investor or someone who has exerted a large influence over the world of finance and odds are you’ll hear something like Warren Buffett. Or Jack Bogle. Maybe a few will rattle off Peter Lynch or Bill Gross. You might even get a George Soros or Bill Miller reference. At the end of the day, there are maybe a dozen or so household names in investing and even that might be generous.
Now ask a group of portfolio managers, financial advisors and traders the same question. You might get some of the same responses as above, but you’ll more than likely get some names that are a little “inside baseball” to the average person. Ed Thorp, Ray Dalio, Howard Marks and Cliff Asness are just a few examples of some of the revered names in investing circles that are discussed among one another like kids trading baseball cards.
I wanted to take this exercise one step further so a few days ago I asked the following question on Twitter:
Friday q: who is the most influential person in finance/investing that (almost) nobody has ever heard of - including pros?— Phil Huber (@bpsandpieces) June 2, 2017
My aim here was to get a glimpse into the stories behind some of the unsung heroes of investing and finance whose groundbreaking work has contributed to the democratization of investing and the evolution of modern financial markets. Furthermore, I wanted to highlight individuals who if you lined up a hundred CFA® charterholders, only a handful would even recognize their names.
We’ll start with Louis Bachelier, the French mathematician considered by many to be the first to use advanced mathematics in the study of finance and the only one on this list that I was already (somewhat) familiar with. Bachelier’s work dates back to the turn of the twentieth century, but is referenced in great detail in two wonderful books: The Physics of Wall Street and The (Mis)behavior of Markets. Benoit Mandelbrot, author of The (Mis)behavior of Markets, wrote the following of Bachelier:
“Genius, in any time or clime, is often unrecognized. Bachelier’s doctoral dissertation was largely ignored by his contemporaries. But his work was translated into English and republished in 1964, and thence was developed into a great edifice of modern economics and finance…A broader variant of Bachelier’s thinking often goes by the title one of my doctoral students, Eugene F. Fama of the University of Chicago, gave it: the Efficient Market Hypothesis.”
Yep, had it not been for the foundation laid by Bachelier, we may have never taken a “random walk down Wall Street.”
Next up on our list are the pioneers who in 1924 launched the first two open-end mutual funds in history, Edward Leffler and Paul Cabot.
“Who was the most important person in mutual-fund history?
In my mind there’s no question about it: His name was Edward G. Leffler, and he invented the open-end fund. I’d be surprised if more than a handful of people in this room have ever heard of Ed Leffler—but he, more than any other single person, got us to where we are today.
Leffler started out selling aluminum pots and pans door-to-door after World War I, but he quickly saw that selling investments had a bit more potential. And he saw that the existing world of closed-end funds, with their stagnant asset base, had to change. In March, 1924, Leffler helped launch Massachusetts Investors Trust, the first open-end fund. Its charter ensured, in Leffler’s words, that 'investors could present their shares and receive liquidating values at any time.'
It’s hard to imagine that such dull words could contain so much dynamite. But suddenly, a mutual fund could do something that was formerly unthinkable: it could grow. It could survive a run of redemptions by replacing the departing shareholders with new ones. It could raise cash from new investors to buy more stocks when they were cheap. And it could spread its costs over a greater asset base, making it more profitable for the adviser to run the fund and cheaper for investors to own it.”
Just a few months after the Massachusetts Investors Trust was created by Leffler, Mr. Cabot co-founded State Street Investment Trust. It was there that he was among the early practitioners of fundamental equity research and is credited with being one of the first to favor price-to-earnings ratios over dividend yield in valuing companies.
Cabot’s achievements reach far beyond his work at State Street. As an advocate for ethical practices in the investment industry, he helped influence important securities legislation, most notably the Investment Company Act of 1940. In addition, Paul served as the Treasurer of Harvard University between 1948 and 1965. It was during his tenure there that the endowment grew from $177 million to over $1 billion. David Swensen often gets credit for creating the “endowment model” that emphasizes illiquid and alternative investments. It was Cabot, however, that originally changed the formula by adding a healthy dose of common stocks to an endowment that until then largely consisted of conservative bonds with little room for appreciation.
Contrary to popular belief, Jack Bogle did not create the first index fund. The first index mutual fund, yes. But the origins of the first index fund created for an institution can be traced back to Wells Fargo in 1971 when the “Samsonite Luggage Fund” was born to manage the corporation’s pension assets. Along with a few others, this fund was the brainchild of William “Bill” Fouse, a leading proponent of bridging the gap between modern portfolio theory concepts and practical investment application. Were it not for Bill’s efforts, the original index fund may have never come to fruition.
Said colleague Wayne Wagner:
“Many have called Bill the father of the index fund, but don’t misinterpret this as an orgasmic event. Bill was the father, the wet nurse, the babysitter, the schoolteacher and, ultimately, the beaming parent at the graduation ceremonies.”
It is estimated that roughly 30% of assets managed today are in some form of an index fund.
Last on our list is certainly not least. In fact, he is Most…Nate Most.
A physicist by training, Nate eventually found his way into finance as a self-proclaimed “commodities man.” It was his experiences in commodities trading that ultimately sparked the idea behind the first Exchange Traded Fund, or ETF. Via ETF.com:
“…he became accustomed to warehouse receipts, “You store a commodity and you get a warehouse receipt and you can finance on that warehouse receipt. You can sell it, do a lot of things with it. Because you don’t want to be moving the merchandise back and forth all the time, so you keep it in place and you simply transfer the warehouse receipt.”
The above quote from Most vaguely describes the creation/redemption mechanism that allows ETFs to function. The concept, however, was anything but an overnight success. As is the case with most innovations, it was met with much skepticism from his employer at the time, the American Stock Exchange, who thought it would never gain approval from the SEC. It took three years of convincing to get them to invest in the project and another three years before the original SPDR ETF went live.
Today ETFs are ubiquitous with over $3 Trillion in AUM and are the driving force behind a generational shift in investor attitudes and preferences.
It’s been said before but it bears repeating: there has never been a better time to be an investor. Advances in portfolio theory, access to information, improvements in transparency, innovation in product development and significant reductions in costs have created an environment that is conducive to successful investor outcomes. We have the aforementioned unsung heroes of investing to thank for their contributions in driving some of this change.
Though there has never been a better time to be an investor, it does not mean that there has never been an easier time to be an investor. The 24/7 news cycle is constantly nipping at our fingertips and we face an abundance of choice when it comes to selecting our investments. These factors can leave a wide margin for unforced errors to occur. Our biggest challenge as investors today is staring at us in the mirror.
There are undoubtedly some brilliant people in finance today working on projects that will alter the investing landscape in exponential ways for future generations. Some will gain widespread notoriety and recognition. Others will fly under the radar and revel in obscurity. One thing is for certain – all of us will benefit.
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