As Google?s historic August 2004 IPO approached, the company?s senior vice president, Jonathan Rosenberg, realized he was about to spawn hundreds of impetuous young multimillionaires. They would, he feared, become the prey of Wall Street brokers, financial advisers, and wealth managers, all offering their own get-even-richer investment schemes.
One by one, some of the most revered names in investment theory were brought in to school a class of brilliant engineers, programmers, and cybergeeks on the fine art of personal investing, something few of them had thought much about.
First to arrive was Stanford University?s William (Bill) Sharpe, 1990 Nobel Laureate economist and professor emeritus of finance at the Graduate School of Business. Sharpe drew a large and enthusiastic audience, which he could have wowed with a PowerPoint presentation on his ?gradient method for asset allocation optimization? or his ?returns-based style analysis for evaluating the performance of investment funds.?
But he spared the young geniuses all that complexity and offered a simple formula instead. ?Don?t try to beat the market,? he said. Put your savings into some indexed mutual funds, which will make you just as much money (if not more) at much less cost by following the market?s natural ebb and flow, and get on with building Google.
The following week it was Burton Malkiel, formerly dean of the Yale School of Management and now a professor of economics at Princeton and author of the classic A Random Walk Down Wall Street. The book, which you?d be unlikely to find on any broker?s bookshelf, suggests that a ?blindfolded monkey? will, in the long run, have as much luck picking a winning investment portfolio as a professional money manager.
Malkiel?s advice to the Google folks was in lockstep with Sharpe?s. Don?t try to beat the market, he said, and don?t believe anyone who tells you they can?not a stock broker, a friend with a hot stock tip, or a financial magazine article touting the latest mutual fund. Seasoned investment professionals have been hearing this anti-industry advice, and the praises of indexing, for years.
But to a class of 20-something quants who?d grown up listening to stories of tech stocks going through the roof and were eager to test their own ability to outpace the averages, the discouraging message came as a surprise. Still, they listened and pondered as they waited for the following week?s lesson from John Bogle.
