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How boring & excellent made Vanguard an investing behemoth

You don't get to manage $3.5 trillion in assets (that's trillion, with a T, folks!) without doing something special. Patrick O'Shaughnessy recently sat down with Vanguard's Gerry O'Reilly, who oversees $800 billion for the largest mutual fund in the world, and Jim Rowley, a Senior Investments Analyst focused on indexing and ETFs. I highly recommend giving it a listen. I learned a lot about how this investing behemoth uses it scale intelligently, and is shaping markets.

O'Shaughnessy - who is something of a book fiend - always asks his guests to suggest some books, offering bonus points for unusual selections. I don't think this week's guests earned the bonus points, since many of O'Shaughnessy's listeners are likely to be familiar with Malcolm Gladwell, Dan Ariely and Freakonomics. But this raised an interesting point. Vanguard's terrific success, and the value it provides to investors, is not predicated on the coruscating insights of its portfolio managers. Rather, the firm's excellence rests on Jack Bogle's original innovation, outstanding execution (which requires its own form of creativity) and a collaborative, unified culture. The investment business and the media still lionize investors who make grand pronouncements about the Fed, China and gold. But the path to sustainable investment excellence is less glamorous than that. And this holds true for stock-pickers as much as it does for indexers like Vanguard. Successful stock selection often rests on the "boring" work of reading financial statements, thinking deeply about corporate strategy and waiting - sometimes excruciatingly long amounts of time - to see the fruits of one's work.

I'm not sure that many investors have the skill or temperament for this kind of boring excellence. That's just one of many reasons that closet indexers will be forced out of the business, as Bill Miller has pointed out. While O'Reilly and Rowley may not have earned bonus points for their book recommendations, they're earning all sorts of points from their investors - and market share in the process. And that, ladies and gentlemen, is how you get to manage $3.5 trillion.

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