He changed the mutual fund industry for the better with a simple idea. This idea improved the fortunes of millions of individual investors, including this writer.
John Bogle is the inventor of the low-cost index fund that is one of the most popular products in the fund industry. Recently, the octogenarian founder of the Vanguard Group of Funds, John Bogle, was honored by fellow financial professionals at the Institute for the Fiduciary Standard and its president, Knut A. Rostad. He is the editor of the book “The Man in the Arena—Vanguard Founder John C. Bogle and His Lifelong Battle to Serve Investors First.”
Billions of dollars are now pouring into passively managed funds each year. Why? It is generally a better deal than pricey managed funds that often get so-so returns. Index investing has been endorsed for the average individual investor by none other than legendary value investor Warren Buffett.
Why is the Sage of Omaha a friend of index investing? Buffett emphasizes that superior returns are, in part, the result of keeping costs low. The latter has been the mantra of Bogle and Vanguard since the fund company began.
However, back in the 1970s, at its birth, index investing was belittled by many in the industry. Passive management of funds was called a mediocre idea by the high-flying fund managers who promised the investor everything and usually delivered very little over the long term. Index investing was immediately controversial because it aimed low. Its goal was only average returns at the lowest possible price because it traded so infrequently.
Index funds were born at a time when the fund world was controlled by active managers who traded like mad. Almost all of them promised that they had found the Holy Grail of investing. Almost all of them said they would obtain above average returns. That, of course, is a mathematical impossibility.
But now, some forty years after Vanguard’s founding, and with the indexing giant having gone from a fund pipsqueak to the fund company with the largest amount of assets, there is no doubt that passive investing has been proven the best method for most individual investors.
Today, Vanguard is the number one fund company. Bogle downplayed that. But he noted that, at one time, Vanguard was once hundreds of billions of dollars behind Fidelity Investments, once the top fund company in the industry. And, more importantly, indexing is also the best way for the Joe Sixpack investor to sidestep much of Wall Street’s high priced and sometimes conflicted financial products.
At his tribute, Bogle, who early in his career was actually fired, sat quietly through a series of fulsome and well-earned tributes. He noted that hearing the funeral plaudits before you die is the best way to live.
“I feel like I’ve gone to my own funeral. It’s very humbling. I’m not as well prepared as these other speakers—the deceased rarely is,” the 84-year old Bogle joshed.
He added that the secret of the company’s success is based on two simple Quaker virtues: “Simplicity and thrift.” Bogle described himself as “a very average person, but very determined and with an ability to do simple arithmetic.” That arithmetic added up to a lot since Bogle’s Vanguard offered the first index fund in 1975.
“We are here to honor one of the few people who has been a champion for the small investor, a man who has also been an innovator,” according to Alan Binder, an academic and a former vice chairman of the Federal Reserve Board.
Binder added that many people have become famous and made a lot of money for themselves. Still, Bogle’s investor friendly standards helped millions of individual investors obtain strong returns. He lauded Bogle, noting he could have made much more for himself and his fund family if he had not dealt so fairly with individual investors.
“Jack is one of the few people in American history who extended the advantages of financial investments to a wider and wider range of Americans,” said Richard Sylla, a market historian and a professor at New York University’s Stern School. He said Bogle is as important to the American economy as Alexander Hamilton, America’s first Secretary of the Treasury and the founder of its first central bank.
Bogle was also lavishly praised by the Institute for the Fiduciary Standard President, Knut A. Rostad, who is the editor of the book “The Man in the Arena—Vanguard Founder John C. Bogle and His Lifelong Battle to Serve Investors First.”
Rostad contended that ultimately the argument for Bogle’s style of investing is the amount of money saved for the average investor. At the end of 2012, the amount of equity fund assets in index and exchange traded funds was 27 percent.
“The average expense ratio for Vanguard’s index funds, for example, in 2012 was 0.10 percent. If Vanguard had charged the average industry expense ratio of 1.15 percent in 2012 on shareholders’ average assets of $164 trillion, their net returns would have been $19 billion less,” according to Rostad.
Today Vanguard is the number one fund company with some $2 trillion in assets. Bogle downplayed that figure but noted that, at one time, Vanguard was hundreds of billions of dollars behind Fidelity Investments, once the top fund company in the industry. Rostad also mentioned that former Fed Chairman Paul Volcker and former president William Jefferson Clinton both have praised Bogle.
“Throughout your celebrated career,” Clinton writes in a letter to Bogle published in the book, “you’ve made it clear that the origins of financial stability lie not within partisanship, but within the people. I continue to be inspired by your common sense solutions for renewing America’s trust with a long term economic vision.”
Bogle added that the secret of the company’s success is based on two simple Quaker virtues: “Simplicity and thrift.” Bogle described himself as “a very average person, but very determined and with an ability to do simple arithmetic.”
Bogle said those two “idiotically simple” ideas have created a revolution in the fund industry as index and exchange traded funds (ETFs) have become very popular. He said that the revolution in the securities industry—a revolution benefitting the individual investor—has been the result of investor demands for thrift and simplicity. The revolution, he added, will continue as “the trading mentality” fades.
(Note: My wife and I, who started with virtually no assets when we married in 1987, have a substantial amount today, in part thanks to dollar-cost averaging—-which means investing a set amount in a fund or funds on a regular monthly basis in good times and bad—-in several Vanguard funds. I am very grateful that Bogle, many of whose books are in my library, revolutionized the investing world as are millions of others who use Vanguard or simply became convinced that the Vanguard sage had a better idea).
Panelists at the Bogle tribute noted that index investing is becoming more popular. Why will the push for simpler and more cost effective investing continue?
“No army,” Bogle says, “can withstand the strength of an idea, or in this case two ideas, whose time has come.”
Gregory Bresiger is a business journalist living in Kew Gardens, New York, who works for the New York Post Sunday business section. His work has appeared in Financial Advisor Magazine, Traders and Mises.com. He is also the author of “Personal Finance for People Who Hate Personal Finance” and the recently published “Money Sense.”