3 Online Pioneers and the Father of the Index Fund

On this day in economic and business history...

Father of the index fund
John C. "Jack" Bogle founded The Vanguard Group on Sept. 24, 1974. Born at the beginning of the Great Depression, Bogle graduated from Princeton in 1951 and began climbing through the ranks of investment management firm Wellington at a time when few young men with elite-university pedigrees thought much of a career in finance. So much the better for today's investors -- after undertaking an ill-conceived merger as Wellington's chairman, which led to his ouster, Bogle founded Vanguard in part to devise ways for the ordinary investor to match the performance of market indexes before "index investing" was possible.

At the time, an easy dig against mutual funds was that they underperformed the S&P 500 (SNPINDEX: ^GSPC  ) , but for its first two years in operation, Vanguard was unable to create an index fund due to securities-industry regulations, and so had to contend itself with managing mutual funds. Bogle reflected on the firm's early years, and how it grew from nearly nothing to market juggernaut, at its 30th anniversary:

In those early days we existed more on faith and hope than on reason. It took all the determination and vitality and spirit that our crew, then numbering just 28 souls, could muster to make the place run. Prohibited at the outset from engaging in investment management and distribution activities, our sole role and responsibility was to administer the operations of 11 mutual funds, with assets of just $1.4 billion.

In less than two years from the day we began our work, however, those walls that so severely proscribed our activities had come tumbling down. By mid-1976, with the underwriting of the world's first index fund, we had begun our investment management activities. Shortly thereafter, early in 1977, we abandoned our longtime broker-dealer-driven sales channel and moved into a new investor-driven-no-load purchase channel and entered the distribution arena.

In short, Vanguard had created an entirely new way to invest. Today, index funds account for about $2 trillion worth of investment assets, according to Bogle. Vanguard itself, which still manages various mutual funds as well as index funds, now manages a total of $2 trillion as well. In 39 years of operation, Vanguard's assets under management have grown at an annualized rate of 20.5%. It's not quite the same as an investment return, but it does speak highly of the value investors have placed on Bogle's buy-it-and-forget-it indexing strategy.

A short, sharp drop
The Dow Jones Industrial Average (DJINDICES: ^DJI  ) fell 7.1% lower on Sept. 24, 1931. As was often the case during the turbulence of the Great Depression, analysts and interested market-watchers (what few remained by that point) found it difficult to explain just what had happened. The New York Times tried, but came up somewhat short:

To Wall Street yesterday's selling movement on the Stock Exchange seemed a mysterious and unexplainable development after the enthusiastic advance [a 6% gain] of the day before. ... The explanation commonly offered was that the "bear party" had suddenly become aggressive again, encouraged by unfavorable dividend developments. ...

During the early part of the week, it was pointed out, an artificial market had prevailed owing to the ruling against short selling. The removal of these restrictions on Wednesday [the 24th] apparently was followed by a resumption of short selling. The increase of the short interest was substantial, judging by the rise in the lending rates on stocks. Despite the acute weakness in the market, many brokers continued to urge investments in common stocks in the belief that a turn for the better could not be long delayed.

Unfortunately, that "turn for the better" would be delayed for more than nine months. By the time the Dow finally hit bottom in early July 1932, it had lost a further 60% from its closing level of Sept. 24, 1931. The Great Depression had a truly brutal way of taking every last shred of market optimism and crushing it into a fine powder.

High-performance corporate engineering
Honda Motor
(NYSE: HMC  ) was incorporated on Sept. 24, 1948, in postwar Japan. Founder Soichiro Honda had been tinkering with engines and machines for roughly two years by that time, and had achieved success as a motorcycle maker. The History website takes an amusing look at the engineering wizard's path to vehicular dominance:

Before he founded the company that bore his name, Soichiro Honda was a drifter and a dreamer. He bounced from one mechanic's job to another, and also worked as a babysitter, a race car driver and an amateur distiller. Even his wife said he was a "wizard at hardly working." In 1946, he took over an old factory that lay mostly in ruins from wartime bombings, though he did not have much of a plan for what he would do there. First he tried building what he called a "rotary weaving machine"; next he tried to mass-produce frosted glass windows, then woven bamboo roof panels. Finally, after he came across a cache of surplus two-stroke motors, he had an idea: motorbikes.

The popularity of Honda's modified motorbikes -- he'd adapted them to run on turpentine due to a lack of gasoline -- necessitated the company's founding, which occurred with an initial capital of 1 million yen (roughly $10,000 at current exchange rates) and 34 employees. No one at work that day really noticed the difference, as Honda's own historical archives recount: "They were all totally absorbed in their work, as always. Nothing about their work was different from the day before, when their organization had been called the Honda Technical Research Institute."

Honda continued to produce motorcycles exclusively until summer 1963, when it began to sell its first small pickup truck. By this point the company was already the world's largest motorcycle manufacturer, thanks to its impressive ability to produce performance machines at a lower cost than the competition. Honda was perhaps the most successful of the major Japanese automakers to breach the American auto market in the 1970s and 1980s, as it had been well-established as a leading motorcycle brand in the United States since 1963. Honda is consistently one of the top five automakers in the United States (it took fifth place in 2012 with 1.4 million auto sales ), and is one of the larger second-tier automakers in the world, with 3.1 million sales in 2011.

Dragonslayer
Ultima Online was released on Sept. 24, 1997. It was the first truly successful "massively multiplayer online," or MMO, role-playing game, and was also the first such game to adopt that descriptive term. Developed by veteran game designer Richard Garriott of Electronic Arts subsidiary Origin Systems, UO, as it is popularly called, set design standards that continue to influence MMOs to this day. Its primary advancement was the creation of a large game world that thousands of players might inhabit at any one time on any one server -- this is now the standard model for nearly all active MMOs, whereas earlier games had been restricted to much smaller per-server user numbers.

The game grew quickly, and was soon the first MMO to surpass 100,000 active subscribers. It eventually peaked at 250,000 subscribers in 2003, but by then UO had been surpassed by EverQuest, a more advanced MMO that had entered development  soon after UO proved the genre's potential. Activision Blizzard's (NASDAQ: ATVI  ) World of Warcraft launched a year after UO's peak. WoW's developers -- many of whom were veteran players of these earlier games -- achieved incredible success by learning from its predecessors' shortcomings. This education led the WoW development team to streamline the experience of character advancement, minimize the pain of in-game death, and create a superior cooperative atmosphere, among other improvements. WoW quickly became both the world's first and only 10-million-subscriber MMO, and the first and only MMO with more than $1 billion in annual subscriber revenue.

Internet, eh?
CompuServe, one of the earliest "information service providers," launched the first connected computer information service for consumers on Sept. 24, 1979. The Internet as we know it didn't exist yet, but CompuServe worked within the extreme technological limitations of the RadioShack TRS-80, which meant that its information service was essentially text-only. Still, a partnership with RadioShack was crucial to CompuServe's early success -- within two years, the CompuServe Information Service had more than 10,000 subscribers logging in on primitive 300-baud modems, which cost $1 per baud (roughly $775 today). To see how wretchedly slow this would be for a modern Internet user, you could try downloading a two-hour high-definition movie on these modems. It would take 563 days.

CompuServe appealed primarily to people in search of good conversation, as its service's chat room became one of its most popular features. However, CompuServe lost ground in the Internet era, despite being the first service to offer online access (initially limited to email) in 1989. By the mid-90s, CompuServe was running far behind upstart AOL and its spam-the-world-with-free-trial-CDs marketing strategy. In 1998, AOL bought CompuServe for $1.2 billion, in one of its many grossly overpriced dot-com era acquisition flubs. CompuServe's Information Service puttered along until 2009, when it was replaced by a newer service called CompuServe 2000. This service is purportedly still operational, but you'd be hard-pressed to find anyone who claims to use it.

Buy it now!
eBay (NASDAQ: EBAY  ) went public on Sept. 24, 1998, soaring 163% above its initial offering price of $18 to close at $47.38. The online auction site, then known primarily as a marketplace for Beanie Baby enthusiasts, finished the day at a valuation of roughly $1.9 billion. It left more than $100 million on the table by underpricing its 3.5 million share offering so far below what the market was willing to pay. Perhaps eBay should have seen this enthusiasm coming, as its user base had grown nearly 2,000% in just two years.

eBay soared into the peak of the dot-com bubble along with many of its overvalued Internet brethren, but fell quickly away from its early 2000 highs after the bubble popped as well. However, since eBay was that rare dot-com start-up with a viable business model, it didn't stay down for long, nor did it ever return to its IPO price. Four years later, at a point when most dot-com stocks had either vanished or fallen to vanishingly small prices, eBay's shares held onto gains of more than 650% from their IPO closing price. It certainly didn't hurt that the company remained profitable for this entire period or that its revenue grew by 1,000% from 1999 to mid-2004 -- net income increased by more than 2,300% in the same time frame.

However, although eBay's top and bottom lines continued to soar throughout its first decade as a public company, its share-price gains eventually moderated. By the 10th anniversary of eBay's IPO, its shares had only gained 1,000%, despite a nearly 9,000% increase in net income.

The next generation of online pioneers
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