Customers' Yachts Ch. 5: What Actually Changed Since 1940

Investment Background

This chapter exists to prevent the book from becoming something dangerous.

The first four chapters described a structural misalignment. Stopping there leads a reader to one conclusion: the financial industry is beyond redemption and should be avoided entirely.

That conclusion is wrong, and it carries a real cost — it makes you avoid the things that genuinely help you, including the low-cost index funds we recommend across this entire site, which are a product of that same industry.

So this chapter runs an honest audit.

The Wall Street Translation

The Genuine Victories

These must be acknowledged at full force, because they are real, enormous, and directly improved ordinary people's position.

One, index funds exist.

The single most important change since Schwed wrote, without dispute.

In 1940, an ordinary person could not hold the whole market cheaply. The choices were picking stocks (almost certainly losing to the market) or buying high-fee active management.

Today anyone can hold thousands of companies globally for a few hundredths of a percent a year.

That is not an incremental improvement. It is an option that did not previously exist.

And it is worth noting: it was created from inside the industry. John Bogle founded Vanguard using a mutual ownership structure — the fund holders own the management company itself, structurally eliminating that agency conflict.

That is a direct, structural answer to Chapter 1's question, and it came from within.

Two, the collapse of commissions.

Stock commissions in 1940 were explicit and high. Today they are zero at most brokers.

This eliminated the most direct conflict Schwed observed: brokers encouraging trades to generate commissions.

Three, disclosure requirements.

Fees must be published. Funds must report holdings. Performance must be presented in standardized form. None of this existed, or existed adequately, in 1940.

Four, fiduciary duty.

Certain categories of advisor are legally required to place client interests ahead of their own. A real legal constraint, not merely a moral exhortation.

Five, information availability.

In 1940, obtaining company financials took genuine effort. Today all of it is free and instant.

What Did Not Change

Having granted those victories, what remains unchanged is clearer and more notable.

One, compensation is still tied to activity — only the form changed.

Commissions vanished, but the revenue did not. It moved:

1940	Today's equivalent
Trading commissions	Payment for order flow, bid-ask spreads
High-fee active funds	Still present, plus alternatives and private products
Broker recommendations	AUM-based advisors, platform recommendation algorithms
Investment newsletters	Subscription services, social media, content marketing

Two, confidence still outsells honesty. Chapter 2's entire argument holds today.

Three, complexity is still profitable. Chapter 4's mechanism is untouched. In fact product complexity far exceeds 1940's.

Four, the fundamental one: the industry still is not paid when you do nothing.

That cannot be fixed by regulation, because it is not a violation. It is the definition of the business model.

A New Problem Schwed Never Saw

Honesty requires noting that some things got worse.

The disappearance of trading friction removed an accidental protection.

Chapter 3 raised this; here it needs stating fully: when trading required calling a broker and paying twenty dollars, impulse trades met a natural speed bump.

When trading is two taps on a phone and free, that speed bump is gone.

And the companies designing those interfaces have revenue that correlates positively with your trading frequency.

This is a problem that did not exist in Schwed's era: an interface in your pocket, optimized specifically to manufacture action.

Misbehaving Chapter 4 discusses "reverse nudges" — how defaults and interface design shape behavior. What this chapter adds: those designs are not neutral, and their direction is set by Chapter 1's misalignment.

A Necessary Balance

This chapter should not produce the opposite overreaction — "the problem is solved."

The correct position is precise:

• At the product level: largely solved. The existence of low-cost broad index funds means an informed individual can obtain market returns today at trivial cost. That was impossible in 1940.
• At the sales level: still present. The optimal product remains the least-marketed one, for the same reasons as in 1940.
• At the behavioral level: possibly worse. Vanished friction and optimized interfaces make self-harm easier than ever.

Put differently: the solution exists and is extremely cheap. Finding it and sticking to it still requires your own judgment.

Which is this book's use today: it does not tell you what to buy — A Random Walk and Winning the Loser's Game do that. It tells you why the correct answer will not be brought to you.

Executable Trading Rules

1. Use the genuine victories; do not let cynicism make you forfeit them. Low-cost index funds are an industry-provided product structurally aligned with you. Use it.

2. Confirm whether your advisor carries fiduciary duty, and ask for it in writing. A specific, executable action. In the United States that distinction is a real legal one.

3. Prefer advice charged as a flat fee or hourly. That compensation structure comes closest to eliminating Chapter 1's misalignment — the advisor's income does not vary with your decision.

4. Deliberately rebuild the frictions that disappeared. Concretely: delete trading apps from your phone, turn off price alerts, set a forty-eight-hour waiting rule. You are substituting for a protection the market once supplied free and has now removed.

5. Audit your actual total cost annually. Because the forms changed, costs became harder to see. Sum every layer into one dollar figure (Chapter 3, rule one).

Relevance to a Retirement Portfolio

This chapter's practical meaning for retirees compresses into one concrete recommendation.

One of the central decisions you face at retirement is what to do with your rollover. And the options today are far better than in 1940:

Option	Cost	Complexity	Who benefits
Stay in the employer plan (if fees are low)	Usually low	Low	You
Move to a self-directed low-cost index portfolio	Very low	Low	You
Move to an AUM-fee managed account	Medium to high	Medium	Both, depending on service
Move into a complex annuity or structured product	Usually high	High	Usually the seller

The first two rows did not exist in 1940. They are direct products of the victories this chapter describes.

So this book's final advice is not to avoid the industry, but:

Use the products structurally aligned with you, avoid those structurally opposed to you, and distinguish the two with Chapter 1's question — if I do nothing, who loses income?

Chapter 6 gives the book's final answer: since the structural conflict cannot be eliminated, what is the correct response?