Jack Bogle: Vanguard, Index Funds, And How To Make Money In The Stock Market

Jack Bogle: Vanguard, Index Funds, And How To Make Money In The Stock Market

Jack Bogle: Vanguard, Index Funds, And How To Make Money In The Stock Market by Vintage Value Investing

Jack Bogle – founder and chairman emeritus of the Vanguard Group and inventor of the index fund – is a true investing legend.

In this interview with Barry Ritholtz for Bloomberg’s Masters in Business podcast series, Bogle tells the fascinating story of Vanguard’s origins, discusses Wall Street’s initial response to index funds, explains what makes Vanguard so unique, and holds a master class on the proper way to invest.

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If you have 90 minutes to set aside this week, I highly recommend listening to the entire interview. The return on your time investment would make it well worth it. But even if you only have 5 minutes to set aside, you can skip to virtually any part of the interview and learn something new, insightful, and very applicable to your own investing (plus you’ll be treated to Bogle’s rich, mahogany voice).

You can download the podcast at iTunes for free or listen to it here.


Additionally, I pulled out my favorite parts from the interview for you below.

Interview with Jack Bogle

Why didn’t other asset management firms start offering index funds sooner? Why were they so reluctant?

Jack Bogle: Well the answer is so simple. Index funds have a real problem: all the damn money goes to the investors. Managers can’t take anything – they’re not managing! [21? mark]

What makes Vanguard different from other firms that now offer index funds?

Jack Bogle: Very few people have the scale that we’ve developed, have the technology that we’ve developed, have the efficiencies that we’ve developed, and also – and I don’t think this is self-serving – have the bully pulpit that we have. You know, imagine Fidelity coming into this business – I described that as “dragged kicking and screaming into the business.” So here we have kicking and screaming over here [Fidelity] – and here we have missionary zeal [Vanguard]. The bully pulpit. [25? mark]

The advantage of index funds

Jack Bogle: Index funds give you the advantage of long-term compounding of returns while eliminating the tyranny of long-term compounding of costs.

So think about it this way. Let’s assume the stock market gives a 7% return over 50 years. If you get to 7%, each $1 goes up to $30. If you get to 5% (that would be 7% less the industry’s typical 2% all-in costs), you get $10. So $10 versus $30. You put up 100% of the capital, you took 100% of the risk, and you got 33% of the return! As I say to people, if that strikes you as a good deal, by all means do it! [27? mark]

On outperformance by active managers

Jack Bogle: It ignores the fact of life in this business – it’s everywhere: Reversion to the mean. Biblically put, “The last shall be first and the first shall be last.” And it happens to hedge funds, it happens to mutual funds, it is basically a fundamental law. [31? mark]

[After the go-go era of the 1950s-60s] We went from prudent investment committees buying blue chip stocks to portfolio managers – comets, and not stars – comets that burn out and their ashes drift gently down to earth, and that’s happened to so many, so many comet managers. The real superstars just don’t stay [on top]. [76? mark]

On diversification into international index funds

Jack Bogle: I’m not [a big fan]. The reason goes back to when I started thinking about it seriously when I was writing Bogle on Mutual Funds.

Look, U.S. companies get half of their revenues and half of their earnings from outside the U.S. You [already] have an international portfolio. Why do you want a larger one?

Then I say, take a look at what comprises that international portfolio. Your largest investment is Japan. Your second largest investment is the U.K. Your third largest investment is France. Now if returns are developed out of national economic strength, does anybody think that the U.K. and Japan and France are going to do better than the U.S. in the next 10, 15, 20 years? I can’t imagine it.

Now I may be wrong, I’m not saying this is written in stone, but that’s 45% of the money. So if people knew that they were putting 45% of their international money (so called international, “non-U.S.” is a better formulation) in Great Britain, France, and Japan, I mean every one of those economies has real problems: The French don’t work very hard, the Japanese have a structured and deeply aging economy overburdened by future retirement claims, and Britain doesn’t know what’s going to happen if they the exit the European community, nor do they know what’s going to happen if they stay in. [54? mark]

Can indexing ever get too big?

Jack Bogle: Well it’s not in the nature of things that indexing could be 100% of the market. If it were we would have chaos. There would be no valuations, there would be no liquidity, there would be no anything. So, what are the chances that indexing would get to 100%? Zero. Right now it’s around 28% of the total market – 35% of the total equity mutual fund industry – so it means that hunk of business is, broadly stated, just removed from the turnover level… So when you put reality in face of the theory that everyone indexes, it’s just not going to happen.

But the other thing is, people follow this statement by saying, “If the market gets more and more indexed, then it will be less efficient. And we’ll be able to beat it more easily.” No! Unequivocally no! Some will beat it, some will lose to it. If the market is less efficient, the winners and the losers will average the market return. There’s no way around that. [65? mark]

You once wrote, “The stock market is a giant distraction to the business of investing.” Explain.

Jack Bogle: Investing is about the long-term. And investing is about earning what I call the “investment return,” which is the dividend yield when you go into the stock market and the earnings growth that follows. That’s investment return. The market return also has a “speculative return,” and that is the price/earnings multiple – if the valuations are high or low when you come in. And if they’re high, they’re going to detract from that return. And if valuations are low, they’re going to add to that return. Because the price/earnings multiple reverts to the mean perfectly.

Today (although it’s a little bit higher today because the market is hardly inexpensive) the reality is it’s just about the same level it was in 1900. So we had ups and downs, booms and busts, but in the long-run speculative return in zero. So concentrate on the investment return. Forget the speculative return, which is very difficult to predict. And just get what the business can give you.

Now if you look every day, you’re apt to do something. One of by basic rules is “Don’t do something, just stand there.” And if you’ve been doing that this year, I think you’re a lot better off – this is a tough year so far. Not that bad… although you’d think it was the end of the world. Don’t let the stock market moves distract you. These moves, daily moves, hourly. minute-by-minute moves, they are a tale told by an idiot, full of sound and fury, signifying nothing.” [68? mark]

What other investors have colored your world view?

Jack Bogle: Well you certainly start with Benjamin Graham. He’s basically ground zero. [And] Walter Morgan[73? mark]

What books would you recommend?

What do you know today that you didn’t know when you started out in 1951?

  • The power of compounding
  • The beauty of keeping costs low
  • The need to ignore the market

Don’t think it’s easy, don’t think you’re smarter than anyone else. Just get in the middle. Get costs out. And don’t peek.


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…
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