America’s investment approaches look as polarized as its politics. Fierce defenders of indexing declare that it trounces stock picking, while active managers proclaim the virtues of their selective research and analysis.
Yet these two camps have more in common than meets the eye. Take two titans of our time: John Bogle, godfather of indexing and the founder of mutual fund giant Vanguard Group, and Warren Buffett, CEO of Berkshire Hathaway
and the gold standard of stock picking. Each man’s accomplishments are a strong case for one side, but more important is what they share.
Start with mutual respect. In his 2017 letter to Berkshire shareholders, Buffett wrote: “If a statue is ever erected to honor the person who has done the most for American investors, the hands down choice should be Jack Bogle.” In a 2018 chapter of a book I edited, “The Warren Buffett Shareholder,” Bogle lauded Buffett as a man of “integrity, wisdom, and class.”
Buffett practiced and preached to several generations the appeal and perils of stock picking. But he has long advised ordinary investors to index, intends for his wife’s bequest to be invested in an index, and won a high-profile bet favoring the index over a stock-picking hedge fund (after fees).
Bogle wrote his college thesis defending indexing, founded one of the most successful index funds, and spent his adult life as the method’s champion. But he endorsed Buffett’s value investing approach and, a few months before he died in January 2019, wrote a Wall Street Journal article warning of the perils of indexing when index funds wield enormous concentrations of power.
Both knew that the other was right, as both forms of investing, and many variations, are intellectually defensible and potentially profitable. Indeed, Bogle and Buffett recognized that all investors contribute something valuable — starting with capital — and each cohort adds something distinctive: indexers offer the market return to millions for cheap while stock-picking channels capital efficiently. Short-term traders add liquidity and shareholder activists promote corporate accountability.
As a thought experiment, however, which approach could America not live without? Which adds the greatest benefit? Suppose all investors adopted an identical strategy. If everyone indexed, markets would freeze; if everyone day-traded, markets would be frenzied; and if everyone were an activist, all of corporate America would be frazzled.
Given that all investor types are needed and important, how can they learn from and benefit from one another? Champions of indexing admit that other investors add value engaging in stock picking, consulting about business particulars and providing constructive criticism.
Likewise, the most fervent proponents of activists appreciate that they cannot alone supply required accountability. After all, they cannot police every company and cannot guarantee that they are always correct in their choice of targets.
Those who question whether short-termism is a significant problem emphasize the presence of substantial long-term owners. Indexers are only nominally long-term — they sell when prices fall — and activists often do come off as short-term opportunists.
An important but often overlooked lesson follows from the special value that shareholders of Buffett’s stripe add: indexers could put far more resources into studying individual companies, and transient investors should prioritize at least a few long-term positions.
After all, indexers wield enormous power. With even a modest increase in resources allocated to the attention of particular business topics, they’d be a huge positive force in corporate America. Rather than governance guidelines and remote control, they would attend annual meetings, read annual letters, participate in engagement, understand capital allocation and help identify highly qualified directors.
Many activists already embrace these principles. More should follow. The cohort would greatly improve its reputation — and therefore its influence.
Worth emphasizing is that few shareholders are purely members of one of these cohorts at all times. Even most of the largest indexers are families of funds that include some focused stock pickers. There are hyperactive trading desks and rapid-fire arbitrageurs at many firms famous for being long-term concentrated investors.
Indexers and traders would certainly benefit from studying the quality shareholder playbook. Just as Buffett learned from Bogle and Bogle learned from Buffett, intelligent shareholders of every type can teach each other a thing or two to make them better investors.
Lawrence A. Cunningham is a professor and director of the Quality Shareholders Initiative at George Washington University. His books include Quality Shareholders; Dear Shareholder; and The Essays of Warren Buffett. Cunningham owns stock in Berkshire Hathaway and is a shareholder, director and vice-chairman of the board of Constellation Software.
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