John Bogle

John Bogle, The Vanguard Group senior chairman & founder, discusses why it’s “counter-intuitive” for the retail investor to invest in the markets based only on its current record levels.”People should be thinking about stocks as return generators and income generators; where in the previous market, it was bonds that did the heavy lifting,” Bogle added.


asked. nice work, ward. let’s bring in the vanguard founder. jack, happy friday to you. good morning. good morning. and thank you. i think the most pertinent question to ask you is really regarding flow. and whether or not you think this year, as we start to see some movement into mutual funds, into equity etfs, is this the beginning of the real thing? has mom and pop really got religion now? i think the answer to that is no. january is seasonally a very good month, as halls been with the year-end reinvestment and pension contributions, has been a very good month for mutual funds. it’s better than it was in the summer and autumn and winter. just last year. and so it’s not the big pop that one would think you’d get. i, for one, think that’s good. you know, when mutual fund investors pile into equities, it’s usually a very negative sign for the market. so something like the dow going 14,000, i can contain my enthusiasm about that. it doesn’t mean very much. and a lot of people have pointed out some of the records that we broke this month — or i should say january, sort of were a reminder of the last time we set those records, which not too happy days were soon to follow, jack. well, yeah, you’re right about that. it’s even more dramatic if you go beyond the dow which has its advantages, and great limits. you go to the nasdaq, and that index is around 4,700 at its high in 2000. and now it’s — you tell me, 3,200 maybe. it’s still fully a third below where it was at its high. so the signs are mixed. i don’t think the economic signs are going to change very much. the path of our economy, which i think 2% real gdp growth in the year 2013 is not a bad target. maybe 2.5%. and that hasn’t changed. whether the dow is 14,000 or 12,000 or 16,000. jack, can i just push back very gently on the idea that retail investors are very bad at picking when to enter and exit the markets. on the normal cycle that is blat ently obvious. but don’t you think it’s very different this time, because the trough was so gratuitous, and because now arguably we’ve removed a lot of those real big threats to the economy, and therefore, it is a sea change perhaps in opinion that we’ve not witnessed for many decades, from dire pessimism not so long ago to perhaps a lot of blue sky now? well, i mean, i think you’re right on that. and i guess what i’m suggesting is, when the retail investors think it’s all blue sky out there, we could all too well be looking for a big pullout. it’s very counterintuitive. they were pulling money out by the hundreds of billions back at the lows in february of 2009, and now they’re — the book markets are up, the nasdaq and dow both, up 100% since then. almost 100%. now they’re putting it in 100% later. and that’s counterintuitive, in terms of investment success. jack, what do you think is holding back retail? is it a demographic issue? we just don’t have as many people who are in the active work force, you have to plan for retirement? is this having touched the hot stove prior to the crisis before? what do you think is tempering enthusiasm? aside from — data aside, empirical evidence aside. well, you know, your hot stove example is really good. mark twain said something like, when a cat sits on a hot stove, he’ll never sit on a hot stove again, but he won’t sit on a cold stove either. he doesn’t know the difference. mark twain’s eloquence comes in to help at this point. i think actually what’s going on with the retail investors is they’ve lost confidence in active management. and that’s why you see these flows pouring into the index funds and pouring out of actively managed funds. and that’s a trend that’s going to persist. they feel burned by paying all that money, for getting poor returns. they lost a lot of trust in the market. they came in thinking the market had a low risk, and now it turns out it has a high risk. the other thing i would say to all investors is, it seems very, very likely that over a decade, and i don’t look at days very often, but over a decade stocks should give us a return of something like 7% a year. just based on 2% dividend yield, and the 5% likely earnings growth, and bonds are going to give us about 2.5%. over the next decade, that’s going to be 100% return on stocks, if those expectations are realized and about 35% return on bonds. people should be thinking about stocks as return generators and income generators, where in the previous market it was bonds that had been heavy lifting. that’s a good point. final question — jack, we don’t normally turn to you for fed discussions. but i wonder, we’ve had an argument this morning about whether or not a reversal in accommodation from the fed can be orderly, or does it have to be painful? is that the one sort of unspoken danger that people aren’t paying enough attention to, how the fed unwinds this? yeah, i think that is a danger. and i also question, first of all, the basis for fed policy. they want to, and have been acting with some success on raising asset prices. but why would one raise asset prices in the stock market if they’re very low raising them, but using them in a counterintuitive exercise. i don’t know if anybody down there knows whether they’re low or high at any time. i think the fed should try to stay out of trying to influence the stock market. i think let the market decide. jack, thank you for your time. jack bogel.

H/T: valueinvestingworld