Vanguard Founder Jack Bogle is Worried That America is Becoming Too Much of a Democracy

Why Vanguard Founder Jack Bogle is Worried That America is Becoming Too Much of a Democracy by John Szramiak was originally published on Vintage Value Investing

Jack Bogle founded Vanguard and helped create the index fund, which right now is completely revolutionizing the financial industry.

You see, the index fund is leveling the playing field and is democratizing investing by giving everyone – whether you’re a small mom & pop investor or a giant pension fund – access to the market average return at very little cost. Hedge funds that can’t consistently beat the market are closing up shop as the evolutionary process of survival of the fittest takes hold and Vanguard – perhaps more than any other asset manager – is benefiting immensely (the company is taking in $1 billion from investors per day).

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So it’s surprising that Jack Bogle – creator of the index fund and long-time champion of Main Street – is most worried that the United States is becoming too democratic.

Isn’t democracy a good thing? Isn’t that what America is all about?

Well… not actually.

In a recent interview with CNN,  Jack Bogle covers many topics – from the stock market, to Trump, to how he is so productive at age 88. Bogle also explains why democracies actually aren’t the ideal form of government, and why the United States was never set up to be a democracy.

You can download a transcript of the interview below for FREE (or watch the entire video of the interview – about 16 minutes – at the bottom of this article).

In the interview, Jack Bogle is asked what worries him the most about the future of the United States. His answer: that the U.S. is becoming too much of a democracy. Here Bogle explains what he means:

I worry about political disunity. I worry about us – this might sound funny to you – but I worry about us becoming too much of a democracy, when our Founding Fathers created a republic. Where the people that knew more could help more… were better educated, were the ones that were elected to fill those various posts and various competitions. And now, it’s more like a democracy, where the people speak. And sometimes that can be very unfortunate. I think a good example of the unfortunate thing is the so-called “Brexit.” It’s actually a pure democratic thing – let’s ask the people whether Britain should remain.”

Jack Bogle’s right about the Founding Fathers. The United States was not established as a direct democracy, which is a form of government in which people decide (e.g. by voting) policy initiatives directly.

Rather, the United States is a republic, which is a form of government in which individuals are elected to represent the citizen body, and they decide policy initiatives. (There’s actually a bit of a nuance to these definitions, because the United States is technically a democratic republic, which is still a democracy, just not a direct one – but you get the point.)

But what’s so bad about the United States becoming more of a direct democracy and less like republic? Doesn’t that mean that policies will more accurately reflect what people actually want?

Well, possibly… But if voters are not adequately informed and educated on the issues they are voting on, then you wind up with decisions like Brexit – which Jack Bogle thinks was a huge mistake:

I think it was a terrible mistake. I think the price will be paid for decades, if not even longer. And a lot of dominoes fall – Scotland is now thinking of leaving, and the United Kingdom won’t be united anymore.So, really, there are so many people who are not taking the time and trouble to think about these issues and they get the same vote as someone who really thinks about and understands it. I’m not saying they would vote differently. But you want a more informed electorate, a more politically aware electorate, an electorate that’s more concerned about their community and not their own interests. And you know in the ideal society that’s the way we should emerge. And the Founding Fathers got it right, and their successors, right up to today, mostly are I think moving troublingly away from the basic values of the country.”

Interestingly, Charlie Munger has made a similar point before. In Munger’s USC Law School Commencement Speech from 2007, Munger told a funny story about there being two types of knowledge – “Planck” knowledge and “chauffeur” knowledge.

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The story goes like this:

“Max Planck when he won the Nobel prize and went around Germany giving lectures on quantum mechanics, and the chauffeur gradually memorized the lecture and he said, ‘Would you mind Professor Planck, because it’s so boring just staying in our routines, would you mind if I gave the lecture this time and you just sat in front with my chauffeur’s hat?’ And Planck said, ‘Sure.’And the chauffeur got up and gave this long lecture on quantum mechanics after which a physics professor stood up in the rear and asked a perfectly ghastly question and the chauffeur said, ‘Well, I’m surprised that in an advanced city like Munich I get such an elementary question, I’m going to ask my chauffeur to reply.’”

The point of that story, according to Charlie Munger, is that there are two types of knowledge in the world:

  • Planck knowledge: These people truly have the knowledge and have paid the dues and have the aptitude.
  • Chauffeur knowledge: These people have learned to prattle the talk, they have a big head of hair, and a nice voice, and they make “a hell of an impression,” but in the end they just have chauffeur knowledge.

It’s important to get the opportunities and the power to make decisions into the hands of people with Planck knowledge, and out of the hands of people with chauffeur knowledge.

This isn’t to say, of course, that politicians in a republic necessarily make better decisions than ordinary voters in a democracy – or that they are even more educated or better informed than ordinary citizens. As Jack Bogle points out, Brexit might have happened anyways even if all the voters were properly educated on the issue.

But in an ideal society, voters need to take the time to really think about and understand issues before voting on them.

Again, you can download a transcript of the interview below for FREE – or keep scrolling to watch the entire video interview.

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Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…