when-being-average-is-above-average-billI recently dined with F. William McNabb III, the CEO of Vanguard International. You will be relieved to know his friends and colleagues call him “Bill”.

I usually do not accept work based dinner invitations. But this was an exception. I have never before been invited to dinner with the CEO of a company that manages 5% of the USA stock market. And that’s just the USA. There is also the rest of the world. Vanguard manages 4 trillion $USA worldwide.

Vanguard is a mutual. A not for profit. All profits go back to investors. It’s a nice model. I like it.

Bill was charmingly pleasant company, happy to tell tales of big business life. A good time was had by all.

It was an eclectic group, just eight of us, advisers, solicitors and journalists. During dinner each diner was asked about their experiences with the indexation approach to investing, the idea of matching a market, say the ASX 200, rather than trying to beat that market.

Some stressed the low cost advantage. Vanguard does not pay “adviser incentives” and is known for its common sense frugality. This translates to better net returns. Over time lower costs compound to significant savings.

Others noted the phenomena of indexation consistently beating the active managers. Very few active fund managers beat the market consistently over time. They may fly high for a year or two, but eventually probability theory takes over and they fall back to the pack, or more probably behind the pack. That’s a fact. Most active fund managers cannot beat the market.

Paradoxically, one of the few active investors who has beaten the market, Warren Buffet, is a fan of indexing. Warren says unless you are full time and well-resourced you should stay clear of active investing and just buy low cost index funds regularly over time. Warren has recommended index funds for decades, and famously recently reprised his advice with some wise words for Cleveland Cavalier basketball legend Le Bron James. You can watch the interview here: Warren Buffet advises Lebron James.

My contribution was more personal.

McMasters has recommended index funds for decades too, from the day we first started advising doctors nearly thirty years ago. Index funds are particularly suited to doctors. Doctors cannot afford to lose sleep worrying about investments. The Russell ASX Long Term Investment Report tells us the twenty year average return on Australian shares is above 9% a year. That includes the Global Financial Crisis, and is consistent with estimates of the 100 year average returns dating back to Federation. So doctors can invest in index funds, and get back to work without losing sleep. Just let time do its work. And realistically expect 9% a year. That’s what’s happened so far.

Not one doctor has complained about our investment advice. We have always been spot on. We have advised doctors they will earn the average of the ASX, and this means if the ASX goes up their investment goes up, and if the ASX goes down their investment goes down. That’s it.

Doctors get it. In the short term markets can and do fall. Unsurprisingly, on average, they fall about every second day. But as your time horizon lengthens, and as the years turn into decades, the indefatigable upward trend emerges. 9% a year. Every year, in the very long run. For the last 100 years.

Bill explained that Vanguard’s goal was to harness emerging technology and the advantages of scale and mutuality to drive costs further down, to a target of 0.1% per annum. That’s virtually cost free. Vanguard is not there yet. And others are on their way too. It’s partly a response to competition and preserving their lead in the low cost investment race.

Bill is realistic about Vanguard’s competition. He acknowledges there are other ways to invest in index funds. Vanguard is not an indexation Robinson Crusoe. Vanguard does not have a monopoly on the indexation concept. But it did invent the indexation concept. And Vanguard is good at it. But others are good at it too. You can buy shares in index based exchange-traded funds, or ETFs, very cheaply using on line brokers such as E-Trade and CommSec.

Dover is product agnostic. There is no product bias. Advisers are free to recommend  index funds if they wish to do so. They are on our approved product list and they are encouraged.

At Dover it’s what you believe is best for your client and most appropriate to your client.