I RECENTLY discussed retirement plans with my old college roommate, Joe, who now runs his own business. As we wrapped up the conversation, Joe asked if I had any book recommendations.
I told him I was about to start Good to Great, the management book by Jim Collins. It’s been a huge bestseller, with four million copies sold. Joe immediately shot back, “John, that book demonstrates precisely why low-cost index funds have to be the answer for most retirement plans. Read it and you’ll see what I mean.”
Initially, I thought Joe was talking about fees, but he wasn’t. Instead, he was referring to the other major reason to own low-cost index funds: diversification.
In seeking to find the best companies—those that go from good to great—Collins had uncovered some general truths about what constitutes the best leaders for a business organization. Collins posits that these leaders end up leaving their companies enduringly better. Did they? Here are some of the great companies that Collins identified:
Circuit City, which went bankrupt in 2008, in part because of the rise of Amazon and online shopping.
Fannie Mae, which effectively imploded during the Great Recession, thanks to bad lending.
Wells Fargo, which has been mired in the fallout from its creation of millions of sham customer accounts.
Clearly, time has proved how difficult it is for the great to stay great—or even good in some cases. To be fair, Collins profiles some companies that haven’t performed nearly so poorly, such as Nucor, Abbott Labs, Kimberly-Clark, Kroger and Walgreens (though the last two have also struggled because of online shopping and the behemoth that is Amazon).
Changes in business models, and disruption caused by low-cost competitors and new technology, happen to the best of companies. Everyday investors can’t reliably predict these things. Even professional money managers struggle to anticipate such changes.
Jim Collins’s thorough research affords today’s readers of Good to Great a tremendous advantage—that of hindsight. He’s demonstrated how difficult it is to identify companies that are enduringly great. (For those curious to read a critical analysis of Good to Great, I recommend The Halo Effect by Phil Rosenzweig.) All this is bad news for investors hoping to profit by buying stocks of great companies run by great leaders.
What to do? My answer is simple: If we can’t reliably predict which companies will succeed, we should just buy the whole stock market through simple low-cost index funds, collect the performance of the market average and bet on America for the long haul. If Warren Buffett, the investing world’s G.O.A.T. (or greatest of all time), couldn’t see that Wells Fargo was committing fraud to juice its numbers, clearly a goat (meaning the farm animal) like me can’t, either.
I participate in the federal government’s Thrift Savings Plan. Each of the retirement plan’s investment options holds a broad collection of securities from whatever market sector it’s seeking to track, plus this diversification comes with very low fees.
Not everybody is so lucky. For those businesses and local governments who have high fee plans, I hope they’ll consider changing, so they offer what’s best for their employees. When you put plan sponsors second and your employees first—beginning with the retirement plan—you take a crucial step in helping your organization go from good to great.