Chapter 5. On Indexing: The Triumph of Experience over Hope

Way back in 1978, in the third annual report of Vanguard Index Trust, the first index fund, I used a quotation from English lexicographer Samuel Johnson to make a point: "It was the triumph of hope over experience." With his inimitable wit, Dr. Johnson was speaking of a man who married for the second time; I was speaking of a poll of pension managers taken by Institutional Investor. Just 17 percent of these money management professionals, the magazine reported, had outpaced the Standard & Poor's 500 Index during the previous decade, but fully 95 percent expected to outpace the Index in the coming decade.

In the years that followed, what we witnessed was quite the reverse: the triumph of experience over hope. The hope of beating the Index was dashed; the hard experience that had characterized so many professional managers before 1978 has repeated itself over and over. The Standard & Poor's 500 Index has outpaced 79 percent of all managers of equity mutual funds that survived the 20 years since then. As 1995 began, I had the temerity to publish a booklet entitled The Triumph of Indexing, describing both the relative performance of the Standard & Poor's 500 Index and the growing acceptance of index mutual funds by the investing public, a trend that I had awaited for so long.

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