There's a wonderful story that comes out of that. Among the underwriters was [the underwriter's] counsel, a man named Steve West who works for Sullivan & Cromwell. He felt so badly at this failed underwriting that he bought a thousand shares of the first index fund, for $15,000. And when we had the celebratory dinner of its 30th anniversary last September, Steve West pulled a little piece of paper out of his pocket and he said, "I have my confirmation for the fund, and I can tell you tonight that that $15,000 is now worth $461,771."

There are lots of people who think they can do better, but we know that we can do well. We know that indexing is a good plan. We know that indexing is the only way that investors can guarantee their fair share of whatever returns the stock market gives us. We know it works, and we also know—if I can end with a little quote from Clauswitz—that the index is a good plan, and that the greatest enemy of a good plan is the dream of a perfect plan. There are a lot of perfect plan dreamers out there, but I would give them little credence.

Wiandt: Kathleen Moriarty, take us through the history of the ETF industry, which really has become the center of the index industry in recent years.

Kathleen Moriarty (Moriarty): It's interesting listening to what John was just saying, because the history of the SPDR in the early days is, weirdly enough, quite similar. The inventor was a man named Nathan Most, and I know at one point early on in the process, he came and talked to John about possibly turning or slicing a piece of the S&P 500 into an exchange-traded fund. Nate at that point was working for the American Stock Exchange, and they were losing volume, and Nate looked at the popularity of mutual funds and thought, gee, if we could trade mutual funds, we'd have trading volume. And John pointed out to Nate that if you did, you'd have a whole lot of portfolio noise going on with the underlying portfolio securities being sold and bought, and that really would sort of defeat the purpose. So Nate agreed with that and went away.

But then, drawing on his commodities background, he began to contemplate the vision of the S&P 500 as a warehouse receipt. He felt, why not just immobilize the 500 stocks the way you do with a commodity? You put it in a warehouse and then you just hand out receipts. So the underlying commodity isn't moving, you just trade in the receipts and then when somebody wants to get out of it, they turn their receipt back in and unwind their position. So the idea of the Standard and Poor's Depository Receipt Trust was born.

In its way, it was just as peculiar from a Wall Street perspective as John's fund was, because it had no load, there weren't any underwriters and there was no 12b-1 or distribution plan fee. The AMEX [American Stock Exchange] was simply concerned about trading volume; they weren't interested in incenting people to buy the fund. So when the launch started, there were probably about 100 people in the world who knew what the SPDR was: a bunch of people from S&P, a bunch of people from the AMEX and a few of us who were service providers. And the selling largely was done by the specialist firms and the upstairs traders and those who initially saw the usefulness of the traded fund future. And it began to trickle out that way.

I think when we first started, we thought it was an intriguing idea. I think Nate was principally looking at it as a small institutional or retail investment, but lots of larger institutions and the houses themselves began to use them as tools as opposed to investments, and that's of course where John began to have issue with how they were used. They weren't really designed to be tools—they were designed to be investments—but because of their flexibility, lots of people began to use them for a whole host of things. So it's an unbelievable success story, and it has spawned many progeny and then cousins.

Wiandt: Well, I've got another controversial topic that we can dive right into. What would happen if everyone indexed? Or what would happen even if 60% of people indexed, or 80% or 20% or whatever the number is? And Floyd has a view on this, which I'm going to give you the opportunity to share now.

Floyd Norris (Norris): I'm sorry to be negative on something for this wonderful occasion. I think that during some recent years before the bubble burst, we got to the point where there was enough indexing that it was moving the market in unfortunate ways.

A function of markets is to ascertain value. That requires people to sit around, read financial statements, visit customers and do all those things we used to think analysts did, and then make decisions on value. Indexing is saying, "I can't do that," and most of us probably can't. The fact that the average mutual fund underperforms the market strikes me as not worth proving. The average mutual fund has costs, while indexes don't, and if we put them all together, it's almost impossible that the group could outperform the market.

If you look at the market now, you'll see that some of the stocks that have not recovered to their 2000 level—and the vast majority have—are the biggest stocks in the country. GE is a prime example. And a reason for that is that much of the interest in these large-cap stocks was driven by indexing during the bubble period, and they therefore performed much better than many other stocks.

Wiandt: And of course, indexing is still evolving today, which is where Bob Shiller comes in. Mr. Shiller, please talk about the evolution of the index industry from the S&P 500 toward where you think we're going.

Robert Shiller (Shiller): When we're talking about the anniversary of the S&P 500, this is an anniversary of a new measurement system, and I think it has the same significance as other measurement systems that physicists or astronomers and other people have invented. The reason the S&P 500, being a value-weighted index, was so important was because it links up with the capital asset pricing model that Harry Markowitz and Bill Sharpe wrote and developed. But that theory is evolving and it's getting more complex as we understand the issues more. Now we're learning that the reliance on a single index, which the original capital asset pricing model had, was oversimplified because that model was oversimplified. When you look at the complexity of the investment problem that people face, it involves much more. So we need multiple indexes and we need to be able to trade them.

The reason why we can't all just invest in the S&P 500 portfolio is that we're all in different circumstances. For example, we have different exposures to real estate risks, and that's why we've now created the S&P Case-Shiller Home Price Indexes, and we've got them up and trading with futures, options, forwards and (I assume) swaps and index-linked notes soon. I think we're making progress, and I'm expecting to see a lot more progress like we've been seeing, which will bring us into just a better management of peoples' risks.

Wiandt: Now that everyone's had a first salvo, I guess we should really launch into the fisticuffs part of the session. Who wants to tackle that topic that Floyd raised about efficient markets and what would happen to the markets if everyone indexed?

Bogle: Well, first let me say something that must be obvious to everyone in the room. Indexing basically does not need modern capital market theory or efficient markets to work. It doesn't matter how efficient the markets are or how inefficient the markets are: If you own the market—inefficient or efficient—the entire market, at a very low cost, you will by definition beat all the people out there as a group who own it at high cost. This is not complicated. The basis for indexing is getting cost out of the system.

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