فصل 6 بخش 3

CHAPTER 6.3

JOHN C. BOGLE: THE VANGUARD OF INVESTING

Creator of the Index Fund; Founder and former CEO of the Vanguard Group

If you haven’t read any of Jack Bogle’s books or listened to his no-nonsense commentary on TV, then you’ve been missing out on an American treasure. Fortune magazine named Bogle one of the four investment giants of the 20th century. He’s been compared with Benjamin Franklin for his inventiveness and civic spirit. Some say he’s done more for the individual investor than anyone in the history of business.

How did he do it? When Jack Bogle founded the Vanguard Group in 1974, index funds were just an academic theory. But Bogle was willing to bet his company on the idea that low-cost, low-fee mutual funds that tracked the performance of the whole stock market would outperform most managed funds year after year. Why? Because investors as a group can’t beat the market, because they are the market. Talk about a disrupter! At first, his index funds were mocked as “Bogle’s Folly.” A competitor even called the idea un-American.

But Bogle brushed off his critics and went on to build Vanguard into the largest mutual fund management firm in the world, with $2.86 trillion in assets under management. How big is that? If Vanguard were a country, its economy would be the same size as Great Britain’s! And now, according to Morningstar, US index funds represent more than a third of all equity mutual fund investments.

Jack Bogle was born in New Jersey in 1929, right at the start of the Great Depression. His family wasn’t wealthy, but Bogle was smart enough to get a scholarship to Princeton, where he served meals to other students to help pay his way. He wrote his senior thesis in economics about mutual funds, hinting at the path he would later carve in the industry. And he never forgot what a friend told him during a summer job as a stock runner: “Bogle, I’m going to tell you everything you need to know about the stock market: nobody knows nothin’.” After graduating magna cum laude, in 1951 he joined the Wellington Management Company in Philadelphia, where he rose to become president. But during the “go-go” years of the mid-1960s, Bogle merged with a management group he hoped would pump up his business. “It was the worst mistake of my life,” he told me. The new partners ran the mutual funds into the ground and then used their seats on the board to fire Bogle.

So what did he do? Instead of accepting defeat, Bogle turned that failure into his greatest victory, one that changed the face of investing. Because of the legal structure of mutual funds, Bogle was still in charge of Wellington’s funds, which were separate from the management company, with a somewhat different board of directors. He stayed on as the funds’ chairman, but he wasn’t allowed to manage them. “So how do I get into investment management without being an investment manager?” he said during our interview. “You’ve already figured out the answer. Start an unmanaged fund. We called it an index fund; I named it Vanguard. At first everybody thought it was a joke.” Incredible! If Jack Bogle hadn’t made that mistake, he would never have founded Vanguard, and millions and millions of individual investors might never have had the chance to avoid excessive fees and add billions of dollars to their collective returns.

I sat down with this living legend in his office on the Vanguard campus in Malvern, Pennsylvania, as a winter storm bore down on the East Coast. He still goes to work every day at the Vanguard research center that he’s headed since stepping down as senior chairman in 2000. Jack shook my hand with the grip of a man half his age. Maybe that’s because a 1996 heart transplant gave him a new lease on life to continue what he calls a “crusade to give investors a fair shake.” What follows is an edited and abridged version of our four-hour conversation.

TR:

Tell me, Jack, where does your drive come from?

JB:

From my earliest memories of my youth, I had to work. I started working at nine delivering newspapers around the block. I always loved it. I’m something of an introvert, and after working all the time, you don’t have to make a lot of idle conversation. And I have a competitive streak. That kind of spoiling for a good fight—even when you don’t need one—makes up for a lot.

TR:

You started your career at a traditional mutual fund management company.

JB:

I was young, I was not wise enough to learn the lessons of history that I should have known, or to act on them. I thought there was such a thing as a permanently good investment manager; there is not. They come and go.

TR:

Why is that?

JB:

There’s an awful lot of luck relative to skill. Investing is 95% luck and 5% skill. And maybe if I’m wrong, it’s 98 and 2.

TR:

Not to insult any active managers!

JB:

Look, you put around 1,024 people flipping coins in a room. You tell them all to flip, and one of those 1,024 is going to flip heads ten times in a row. And you’d say, “What a lucky guy.” Right? But in the fund business, you’d say, “What a genius.” [Laughs.] You can even have gorillas do it, and the outcome is exactly the same!

TR:

What did you mean when you said, “There’s a big difference between a smart guy and a good investor”?

JB:

Well, first of all, investors are average. Let’s start with that. Very simple. And most individual investors pay too much for the privilege of being average.

TR:

How’s that?

JB:

Active management is going to cost you around 2% all-in for the average fund (including the 1.2% average expense ratio, transaction costs, cash drag, and sales charges). So that means in a 7% market, they’ll get 5. [An index fund that costs 0.05% means that you get a 6.95% return.] At 6.95%, you turn $1 into about $30 over 50 years. But at 5%, you get $10 instead of $30. And what does that mean? It means you put up 100% of the cash, you took 100% of the risk, and you got 30% of the reward. That’s what happens when you look at returns over the long term. People don’t, but they’re going to have to learn to do that.

TR:

They don’t see the compounding of costs and compounding of fees.

JB:

People out there really should understand why they’re buying stocks. It’s for the dividend yield, and it’s for the earnings growth. The fact is that over the long term, half of the return in the stock market has come from dividends. And that’s where all the fund’s expenses come from. So think about this for a minute, Tony: The gross yield of the average equity fund is 2%. The average equity fund has an expense ratio of 1.2%. They’re going to take that out of that yield. So you’re getting a yield of 0.8%. The manager is taking half of your dividends to pay himself! And this industry is consuming every bit of 60% of dividends. And sometimes 100% and sometimes more than 100%. You can see why I’m such a pain in the tail to the industry.

TR:

Yet there are still 100 million people invested in actively managed mutual funds. How is that humanly possible?

JB:

Well, never underestimate the power of marketing. Back in 2000, we checked, and the average fund that was advertised in Money magazine then had an annual return of 41%. Many of these funds—perhaps most—are no longer around. Investors expect their smart manager will be smart forever, but it won’t happen. They expect that he’s generated 20% returns, he’ll continue to generate 20%. And that’s just ridiculous; it can’t happen, it won’t happen.

TR:

Vanguard is managed only to benefit its fund shareholders, who actually own the company. Are you a supporter of the universal fiduciary standard?

JB:

I’m a demander, and I may be one of the very first. The Investment Company Institute [the mutual fund industry’s lobbying organization] says, “We don’t need a federal standard of fiduciary duty. We are a fiduciary.” Well, number one, then why do they object to it? That’s an interesting question.

But number two, they don’t understand we have this conflict of fiduciary duties. The manager of a publicly held firm like, say, BlackRock has two sets of fiduciary duties. One is fiduciary duty to the shareholders of the BlackRock mutual funds, to maximize their returns. And the other is the fiduciary duty to earn the most money they possibly can for the public owners of BlackRock. And so BlackRock CEO Laurence D. Fink has the consummate dilemma. To maximize the return to mutual fund shareholders, he must lower fees. But to maximize the return to the owners of BlackRock, he must increase fees. So they’re trying to do both. And the company is making more money than ever.

TR:

How ironic.

JB:

Is this a great country, or what?

TR:

What’s next, in your mind, over the next ten years that is compelling and/or challenging?

JB:

I see corporate America continuing to grow. And, remember, the stock market is a derivative. It’s a derivative of the value created by our corporations. They earn money, and they’re going to continue to earn money. They may earn a little less, but they will still get bigger and bigger, more and more efficient. So they’ll continue growing, probably at a slower rate than we’re accustomed to, but still a healthy rate.

TR:

Primarily because spending will decrease based on demographics, or because we’ve just borrowed so much that we have to still get our house in order?

JB:

We still have to deleverage. There’s too much borrowing in the country. There’s not really too much leverage on the corporate side. Corporate balance sheets are in pretty good shape. But government balance sheets, including federal, state, and local, are all overextended. And we’ve got to do something about that.

One of the big risks—one of the big questions, really—is the Federal Reserve now has in round numbers $4 trillion in reserves. That’s $3 trillion more than usual, with about $3 trillion having been acquired in the last five, six years. And that has to be unwound. And it’s not clear to anybody exactly how that’s going to happen. But everybody knows it has to happen sooner or later.

TR:

How concerned should we be about another financial crisis?

JB:

If you’re thinking not as an average investor but as someone who is thinking about the big picture, never lose your sense of history. Don’t think it won’t repeat itself. As Mark Twain says, “History may not repeat itself, but it rhymes.” So we do face the possibility of a serious world financial crisis. Even a world depression. What are the chances of a world depression? I’d say maybe one in ten. But it’s not one in a thousand. So I don’t look at it as likely, but anyone that says “It can’t happen here” is wrong— TR:

—is not paying attention to history.

JB:

Yes. So, basically, use your God-given common sense. Not getting carried away by the fads and fashions of the moment. And not getting carried away by the momentary gyrations in the markets, stocks or bond.

TR:

In your 64 years in the business, you’ve gone through every type of market. How do you take the human emotional element out of investing?

JB:

None of us can, including me. I’m trying to. People say, “How do you feel when the market goes down 50%?” I say, honestly, I feel miserable. I get knots in my stomach. So what do I do? I get out a couple of my books on “staying the course” and reread them!

TR:

If you couldn’t pass on any money to your kids or grandkids, but you could pass on some principles, what would they be?

JB:

I would say, to begin with, pay attention to where your assets are invested. Choose your asset allocation in accordance with your risk tolerance and your objectives. Number two would be, diversify. And be sure and diversify through low-cost index funds. There are a lot of high-cost ones out there. We shouldn’t forget that. And don’t trade. Don’t do something—just stand there! No matter what! And you’ll be able to resist that temptation more easily if you had a little bit more of your assets allocated to bonds than you think you should.

TR:

What other advice do you have for investors?

JB:

Don’t open the Wall Street Journal! Don’t watch CNBC! We kid about it. I do interviews on CNBC a lot, and I keep wondering why they keep asking me back. I can handle somewhere between 40 seconds and 50 seconds of Jim Cramer. All the yelling and screaming and buy this and sell that. That’s a distraction to the business of investing. We spend too much time, focus too much of our energy on all these things to do with investing, when you know what the outcome’s going to be. You’re going to get the market return plus or minus something. Mostly minus. And so why spend all this time trying to trade the Standard & Poor’s 500 all day long in real time, as an early marketing campaign for the first ETF [exchange-traded fund] suggested?

Anybody who is doing that should get a life. Take the kids out to the park. Take your wife out to dinner. If all else fails, read a good book.

TR:

What does money mean to you?

JB:

I look at money not as an end but a means to an end. There’s a great story about the two writers Kurt Vonnegut and Joe Heller. They meet at a party on Shelter Island. Kurt looks at Joe and says, “That guy, our host over there, he made a billion dollars today. He’s made more money in one day than you made on every single copy of Catch-22.” And Heller looks at Vonnegut and says, “That’s okay, because I have something he, our host, will never have. Enough.” I’m leaving my kids enough so they can do anything that they want, but not so much they can do nothing. I often say to them, “Sometimes I wish that you would have grown up with all the advantages I had.” And their first reaction was, “Don’t you mean disadvantages?” “No, kid, I don’t. I mean advantages. Getting along in the world, working your way through it all.” TR:

It took years for the concept of indexing to take hold, and now index funds are taking the industry by storm. How’s it feel to be right?

JB:

Well, people say, you must be very proud. Look at what you built. And I tell them, there will be time for that, I think, someday. But not yet. I think it’s Sophocles who said, “One must wait until the evening to enjoy the splendor of the day.” And my evening isn’t here yet.

You know, I’ve got to confess to you, I should have been dead a long, long time ago. I had eight heart attacks before I got the heart [transplant]. My heart stopped. And I have no right to be around. But it is absolutely fabulous to be alive. I don’t spend a lot of time thinking about this. But I realize that I am seeing what I believe is the triumph of indexing. And really a revolution in investor preferences. There’s not any question about that. It’s going to change Wall Street. Wall Street’s getting a lot smaller. I’m not sure I understand the thing fully, but I’m guessing if I were dead, I wouldn’t be seeing it.

TR:

Will you ever retire, by the way?

JB:

Probably more likely to be in God’s hands than mine. I’m enjoying myself, and thriving on my mission to give investors a fair shake.

Jack Bogle Portfolio Core Principles

1. Asset allocation in accordance with your risk tolerance and your objectives.

2. Diversify through low-cost index funds.

3. Have as much in bond funds as your age. A “crude” benchmark, he says.

Jack is in his 80s and has 40% of his total portfolio invested in bonds. But a very young person could be 100% equities.

So in my total portfolio, including both my personal and retirement accounts, about 60% of my assets are in stocks, mostly in Vanguard’s stock index funds. The rest is split between Vanguard’s Total Bond Market Index Fund and tax-exempt [municipal bond] funds. My municipal bond holdings are split about two-thirds in Vanguard’s Intermediate-Term Tax-Exempt Fund and about one-third in Vanguard’s Limited-Term Tax-Exempt Fund [limited being somewhere between short and intermediate; a little bit longer for the extra yield].

I won’t need to draw on the money, I hope, in my taxable portfolio. And those are still nice tax-exempt yields, around 3% or so, which is the equivalent of 5% for someone in my tax bracket, and I don’t need any more than that. I’m happy to get it.

I worry a little bit, of course, about the solidity of the municipal bond market, but I’ve decided that with our top-notch analysts here at Vanguard, they should be okay. In my tax-deferred portfolio, which is my largest asset, my bond assets are largely in Vanguard’s Total Bond Market Index Fund. That includes long-, intermediate-, and short-term bonds. It holds Treasury, mortgage, and corporate bonds.

I’m very satisfied with the returns on my total portfolio. After an awful 17% decline in 2008 [the S&P 500 was down 37% that year, more than twice as much], my returns have been consistently positive, averaging almost 10% per year. I’m happy to simply “stay the course” and ride it all out.