Happy Birthday Vanguard (I got you a Spotify account as a gift!)

This morning, the Marketplace Morning Report  had a story on Vanguard's 40th birthday and a piece on revenue growth in music streaming. 

It dawned on me that Spotify and Vanguard shared similar dynamics - they are both disruptive innovations - and if that's the case, then it follows that stock pickers are the equivalent of hifi-enthusiasts in an ETF-dominated world; a shrinking community of music perfectionists that think they do it "better" than everyone else. 

Through the lens of convenience, "better" isn't about sound quality and imaging but about pervasiveness and availability. 

There are countless places we've accepted - for the sake of convenience - "lower quality experiences" in our lives. That's a key aspect of disruptive innovation that Vanguard brought to the investment world (the program starts at 3:40)

Vanguard's innovation? At a time when people were trying to beat the market with exceptional results, Vanguard offered a way to be ... unexceptional ... and now its S&P 500 mutual fund and Total Stock Markets Fund are the two largest funds in the country. 

What an incredible experience for the average person who doesn't follow the markets, who doesn't know how to tell a good investment from a bad investment - or even a good investment manager from a bad one - and who has no financial education to not have to make a decision and concurrently be freed from the bonds of snake oil salesmen with the ease and convenience of buying something that's simply good enough. 

What - if anything - are those people missing? And what can I learn from this as a startup RIA focused on small cap investing? 

I don't think people know what they're missing. Many treat their investment and retirement savings with little thought - and much hope - probably b/c they don't know how to think about it, or they've never entertained the notion of "I can invest." So they outsource it.

On the latter - what can I learn? - how do I reach people who don't know what they're missing? I guess I could start a fund and focus on the small market of other hifi enthusiasts who don't want to listen to a compressed version of Eine Alpensinfonie or won't watch "Lawrence of Arabia" on a cellphone. 

I'm passionate about trying to reach a wider audience to help them understand the choices they face, provide some education and service, and, potentially, deliver returns on capital that exceed the market, with less risk, less tumult, and also while avoiding companies whose missions are opposed by my clients. (When you own the S&P, you own companies that build guns, burns coal, promote addictions, etc. Why should someone opposed to those endeavors accept them in their investment portfolios?)

To anyone who thinks investing is hard, I tell them that picking stocks is just a concentrated form of the same decisions people make all the time: what shoes to wear, what fruit to buy, what to eat for dinner. Once you lay out the parameters, it's easier to make a decision. Not easy, but easier.

As an avid investor, I balance the difficulty of decision making with the alternative, and I can't fathom why someone would want to risk capital on an undifferentiated mass of companies whose value - on whole - tracks GDP growth +/- people's attitudes (ie multiples). Why would I want to outsource mine and my clients' capital to other people's attitudes when knowledge and experience can do better? Instead, I prefer to make decisions, and as few as possible. 

Finally, I firmly believe that we lose things when we accept unexceptional, in the investment world and in the real world. 

What we lose in the process of making undifferentiated investments, is, I think a key point in that Sanford Bernstein piece from awhile back, that if we're no longer allocating capital to its best and highest use but simply spreading it around, we disrupt price signals and outsource returns simply to a function of interest rates and money supply. 

And in the personal world, there maybe even worse consequences. Music, art, movies, conversations with people, travel, real adventures - not 3D replicas - these experiences create emotions. Video games create emotions too, that's why they're so much fun. But when we dial down the experiences to a virtual one, I think we limit our emotional selves. We can't possibly experience the same catharsis at a 160 kbps bit rate as we do in real life. 

In both the investment world and the world around us, when the effort at reproduction isn't towards replicating the best experience but only about convenience and accessibility - yeah, it's good enough - something is lost. We shrink the world to a bunch of correlated experiences, rather than expand it to a variety of global ones. 

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