Chapter 33

Paul A. Samuelson

New York Times, December 14, 2009

 

Paul A. Samuelson, Economist, Dies at 94

Paul A. Samuelson, the first American Nobel Laureate in economics and the foremost academic economist of the 20th century, died Sunday at his home in Belmont, Mass. He was 94.

 

His death was announced by the Massachusetts Institute of Technology, which Mr. Samuelson helped build into one of the world’s great centers of graduate education in economics.

 

In receiving the Nobel Prize in 1970, Mr. Samuelson was credited with transforming his discipline from one that ruminates about economic issues to one that solves problems, answering questions about cause and effect with mathematical rigor and clarity. . . .

 

Mr. Samuelson wrote one of the most widely used college textbooks in the history of American education. The book, Economics, first published in 1948, was the nation’s best-selling textbook for nearly 30 years. Translated into 20 languages, it was selling 50,000 copies a year a half century after it first appeared. “I don’t care who writes a nation’s laws—or crafts its advanced treatises—if I can write its economics textbooks,” Mr. Samuelson said. . . .

My first encounter, as it were, with Paul Samuelson came in September 1948. At the beginning of my sophomore year at Princeton University, I took my first course in economics; our textbook was the first edition of Dr. Samuelson’s Economics: An Introductory Analysis. (My marked-up copy still graces the shelves of my library.) Truth told, I found the book tough going, and fared poorly in my first stab at this new (to me) subject. I received a grade of 4+ (D+ in today’s lexicon) at midterm. Since I was required to maintain an average of at least 3- (C-) to maintain the full scholarship that Princeton had provided me, if I did not improve by the end of the semester, my college career would be over.

I struggled, but I made the grade I needed by semester’s end, gaining the coveted (but marginal to a fault) 3. My grades continued to improve, and—thanks largely to the 1+ that I earned on my senior thesis on the mutual fund industry—“The Economic Role of the Investment Company” (a long way from the macroeconomics of Dr. Samuelson’s book!)—I graduated magna cum laude in Economics.

Priceless Endorsements

From its lowly beginning in 1948, my association with Paul Samuelson had a wonderful turnaround. Some 45 years later, in 1993, I asked him to endorse my first book—Bogle on Mutual Funds. He demurred, but to my utter astonishment he told me that he would prefer to write the foreword. Some excerpts:

The same surgeon general who required cigarette packages to say: “Warning, this product may be dangerous to your health” ought to require that 99 out of 100 books written on personal finance carry that same label. The exceptions are rare. Benjamin Graham’s The Intelligent Investor is one. Now it is high praise when I endorse Bogle on Mutual Funds as another . . . . I have no association with The Vanguard Group of funds other than as a charter member investor, along with numerous children and innumerable grandchildren. So, as a disinterested witness in the court of opinion, perhaps my seconding his suggestions will carry some weight. John Bogle has changed a basic industry in the optimal direction. Of very few can this be said.

Five years after that—a half-century after our initial encounter—he wrote a wonderful endorsement of the first edition of Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor, and a decade later offered this lovely endorsement in its 10th anniversary edition published late in 2009, shortly before his long journey through life came to an end: “The only thing better than Bogle’s original book is its improved revision. Bon appetit!”

But I’ve gotten way ahead of myself. Paul Samuelson and I finally met in the mid-1980s in his office on the MIT campus in Cambridge, Massachusetts, a meeting inspired by the common cause we came to share: the need for an “index fund” that would own stocks of the largest 500 corporations in America, providing the broadest possible diversification, paying no investment advisory fees, with virtually no portfolio turnover, adding great cost efficiency and remarkable tax efficiency.

While I had hinted at the merit of an index fund in my Princeton thesis (mutual funds “can make no claim to superiority over the market averages”), I ignored that important finding for years. But in mid-1975, I decided that the time was ripe for the world’s first index fund, importantly because of Paul Samuelson’s inspiration.

Challenge to Judgment

Then inspiration came when I read “Challenge to Judgment,” his lead essay in the inaugural edition of the Journal of Portfolio Management (Fall 1974). In his essay, he pleaded “that, at the least, some large foundation set up an in-house portfolio that tracks the S&P 500 Index—if only for the purpose of setting up a naïve model against which their in-house gunslingers can measure their prowess. . . . The American Economic Association might contemplate setting up for its members a no-load, no-management-fee, virtually no-transaction-turnover fund,” noting, however, the perhaps insurmountable difficulty that “there may be less supernumerary wealth to be found among 20,000 economists than among 20,000 chiropractors.”

Paul Samuelson concluded his “challenge to judgment” by explicitly calling for those who disagreed that a passive index would outperform most active managers to dispose of “that uncomfortable brute fact”—that it is virtually impossible for academics with access to public records to identify any consistently excellent performers—“in the only way that any fact is disposed of—by producing brute evidence to the contrary.” There is no record that anyone tried to produce such brute evidence, nor is it likely that it could have been produced. But Paul Samuelson had laid down an express challenge for somebody, somewhere to start an index fund.

Confronted with that demand, I couldn’t stand back any longer. It now seemed clear that the newly formed Vanguard Group (then only a few months old) ought to be “in the vanguard” of this new logical concept, so strongly supported by data on past fund performance, so well known in academia but acknowledged by few in the industry. It was the opportunity of a lifetime: to at once prove that the basic principles enunciated in the JPM article could be put into practice and work effectively, and to mark this upstart of a firm as a pioneer in a new wave of industry development. With luck and hard work, the idea that had begun to germinate in my mind in my ancient senior thesis could finally become a reality.

The Newsweek Column

The initial press reception to the underwriting had been reasonably good, but bereft of a single hint that the index fund represented the beginning of a new era for the mutual fund industry. The most enthusiastic comments came from Professor Samuelson himself. Writing in his Newsweek column in August 1976, he expressed delight that there had finally been a response to his earlier challenge: “As yet there exists no convenient fund that apes the whole market, requires no load, and keeps commissions, turnover and management fees to the feasible minimum.”

Now such a fund lay in prospect. “Sooner than I dared expect,” he wrote, “my explicit prayer has been answered. There is coming to market, I see from a crisp new prospectus, something called the First Index Investment Trust” (the original name of what is now Vanguard 500 Index Fund). He conceded that the fund met only five of his six requirements: (1) availability for investors of modest means; (2) proposing to match the broad-based S&P 500 index; (3) carrying an extremely small annual expense charge of only 0.20 percent; (4) offering extremely low portfolio turnover; and (5) “best of all, giving the broadest diversification needed to maximize mean return with minimum portfolio variance and volatility.” His sixth requirement—that it be a no-load fund—had not been met but, he graciously conceded, “a professor’s prayers are rarely answered in full.”

As it was to happen, Dr. Samuelson’s prayer would be answered in full within six months. Until then, given our obvious need to enlist broker support for an underwriting, the Trust carried an initial sales charge (low by mutual fund standards in those days—6 percent on smaller investments, tapered down to 1 percent on investments of $1 million or more). However, Vanguard was soon to change its distribution strategy. In February 1977, the Vanguard funds eliminated all sales charges and made an unprecedented conversion to a “no-load” distribution system.

Mutual Admiration

Paul Samuelson and I met face-to-face only perhaps a half-dozen times during our (arguably) 61-year relationship, but he often sent me notes, and must have made at least a score of telephone calls to me in my office. When he called, I’d quickly grab a yellow legal pad and pen, for I knew he’d be giving me a range of rapid-fire ideas to improve that first index mutual fund, in ways large and small. At first I was intimidated (of course!), but as time went on I appreciated not only his brilliance, but his warmth, his friendly sense of humor,²⁴¹ and his patience with a mind far smaller than his own.

One brief handwritten note comes to mind: Late in June 2005 (dated “mid-summer day”) he wrote: “Any small influence on you has been more than offset by what Vanguard has done for my 6 children and 15 grandchildren. May Darwin bless you!” Our mutual admiration culminated in the dedication of my 2007 book—The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns—to Paul A. Samuelson. The final words: “Now in his 92nd year, he remains my mentor, my inspiration, my shining light.”

Surely his highest accolade for my modest accomplishments came in Paul Samuelson’s speech at the Boston Security Analysts Society on November 15, 2005: “I rank this Bogle invention along with the invention of the wheel, wine and cheese, the alphabet, and Gutenberg printing: a mutual fund that never made Bogle rich but elevated the long-term returns of the mutual-fund owners. Something new under the sun.” Those words from a giant—“the foremost academic economist of the 20th century”—mean much to me, but it is the intellectual challenge, the friendship, and the unfailing support of this fine human being that I shall miss most profoundly.