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Jack Bogle: If You Hold The Stock Market, You Will Grow With The USA

Jack Bogle, founder and former CEO of Vanguard, joins ‘Power Lunch’ to discuss how we could avoid the financial crisis from 10 years ago.

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Jack Bogle: If You Hold The Stock Market, You Will Grow With America

Transcript

The bad years the crisis years. The Dow dropped by about 50 percent. And since then it's you know and people panicked and got out of course. Even in the mutual fund business and particularly in the ETF business a lot of net liquidations at Billos and now we're back I think again from that level is maybe 200 percent. So it shows you that when you act on the emotions of the marketplace you're making a big mistake. You know I stay and always have said stay the course. Don't let these changes in the market. Even the big one that was a 50 percent decline. Don't let that change your mind. And never never never be in or out of the market always be in at a certain level. And you may want to be 50 percent in stocks like I am. You may want to be 75 percent or 25 percent that's probably a decent range but never be out and think he can get back in because your emotions will defeat you totally.

One of my favorite Jack Bogle lines is when somebody says buy and hold is dead or when they ask you is buying hold. What do you say. You always say pennies are what you buy.

Right. Well the buying holds for a stock is one thing. Buy and hold theU.S. stock. Morgan is quite a different one. You know what do we have going for us in theU.S. stock. We're leaving aside how hard it is to pick the winners how few people really ever heard of Amazon 25 years ago and to say nothing of Google. Maybe a little more than that maybe 30 years ago. So if you hold the stock market you will not to be corny Bill but you will grow with America. The correlation between the long term growth of America's gross domestic product so-called GDP and and the stock market is something like 95 but the annual correlation of those two things is probably 20. So you know you're making a good long term bet but short term betting is just not a good way to go.

Jack I want to ask you about what could possibly cause the next crisis. And I want to bring your attention to a note that was released by JP Morgan last week called the great liquidity crisis and in it they say that it's the move it's a massive move in funds to passive investing that could help spark this next liquidity crisis and in turn the next financial crisis there's a large pool of buyers out there that are mechanical buyers and electronic trading desks. At a time when volatility spikes tend to step away from the market reducing liquidity even further. Do you think that the market structure as it is right now could contribute to this sort of liquidity crunch the next time we have a volatility spike.

Well to be honest there are areas of the exchange traded fund market in particular that could be very much subject to the same kind of pressures liquidity pressures that you're talking about when you get into the main part of the of the index fund market. The S&P 500 the totalU.S. stock market is not really conceivable because they are the market and this is a panic there. There will be a panic everywhere by definition. So I think to call out panic is more than anything else I believe an attempt to say be careful of those index funds and what they really mean by that is use our active management will do better even though they know deep down they will not.

Sorry sorry Jack just to clarify when you say a certain exchange traded funds what kinds of ETF are you talking about. Because most people are invested in the S&P 500 through General Index ETF so which ETF do you think are certain about.

High yield is always a problem. They've had liquidity problems before and they may well happen again. And what's interesting about high yields and it's a statement about the market's tolerance for risk is the yields on the high yield bonds. Are Much of the spread between the yields on high yields and corporate bonds are much narrower than they've been before. People don't think they're that risky and they could easily get a very unpleasant surprise.