Mutual-fund shareholders may never again see a folk hero like John C. Bogle, father of the index fund and the founder and former chairman of fund-industry titan Vanguard Group.
Bogle was an outspoken, iconoclastic, in-your-face champion for low-cost, buy-and-hold investing — a populist in a business suit who spent six decades criticizing, cajoling and challenging his fund-industry colleagues to give small investors what he called “a fair shake.”
Advocate and provocateur
Bogle passed away on Wednesday at age 89. He was one of nine investing luminaries profiled in my 2001 book, “Investment Titans: Investment Insights from the Minds That Move Wall Street,” and a consistent source of wisdom and insight about investors and the investment business. This article is adapted from the chapter of that book featuring Bogle, titled “The Average Outperforms.”
Bogle relished his role as an advocate and provocateur. He certainly looked the part — tall and lanky with a sonorous voice, a Princeton-educated everyman hammering out liberty and justice for small investors. It’s a part Jack Bogle was literally born to play. His father came from a well-to-do family that had prospered in business, but he had no great aptitude for it. The younger Bogle took after his maternal great-grandfather, Philander B. Armstrong, a maverick who conceived of mutual insurance in the property field and in 1875 formed a company called the Phoenix Mutual Fire Insurance Co. Armstrong would spend his career railing against excessive industry fees and expenses, and Bogle later carried that torch for individual investors.
‘Strip all the baloney out of it’
He rarely missed an opportunity to pound home the direct and clear relationship between low management fees and superior investment returns. In 1975, a century after his great-grandfather started his insurance company, Bogle opened the doors of Vanguard as a mutual fund company in the truest sense of the ideal. Shareholders of Vanguard funds “own” the management company that administers the funds. Unlike other fund companies, Vanguard operates at cost, with each fund paying its share of the corporation’s expenses for management, portfolio trading, salaries, marketing, advertising and other charges.
In his interview for the book, Bogle said, with characteristic bluntness: “This business is all about simplicity and low cost. I’m not into all these market strategies and theories and cost-benefit analyses — all the bureaucracy that goes with business. In investing, strip all the baloney out of it, and give people what you promise.”
To understand Bogle more fully, it helps to see him almost 70 years ago as a Princeton University undergraduate on an academic scholarship. Bogle needed a topic for his senior thesis in economics. True to character, he was determined to tackle a subject on which no Princeton thesis had ever been written. But he wasn’t sure where to turn.
A ‘remarkable accident’
In December 1949, he happened to read an article in Fortune magazine titled “Big Money in Boston.” The report described the mutual-fund business as a “rapidly expanding and somewhat contentious industry that could be of great potential significance to U.S. business.” Bogle recalled that he had never heard of mutual funds before, let alone invested in them. Perhaps he identified with the “contentious” label. Whatever the motivation, he decided to make this nascent industry the subject of his thesis. This “remarkable accident,” as Bogle referred to it, sparked the remarkable career that profoundly influenced how people approach investing and markets. “If I hadn’t opened that magazine, I wouldn’t be in this business today,” he observed.
His senior thesis, published in April 1951, was titled “The Economic Role of the Investment Company.” Certain passages foreshadow how its nonconformist author would one day shake the status quo of active money management with an innovative upstart called an index fund.
In his thesis, Bogle introduces two themes that would become synonymous with his professional life: performance and costs. He exhorts the fund industry not to boast that it outdoes the market: “Funds can make no claim to superiority over the market averages,” he writes. Then he suggests that fund companies might be overvaluing their services: “There is some indication that the cost of management is too high,” Bogle ventures. He concludes with the admonition that the fund industry’s continued success hinges on giving shareholders a financial break: “Future growth can be maximized by concentration on a reduction of sales loads and management fees,” he asserts.
In an interview 50 years later, Bogle expressed pride in his thesis, noting: “The thesis said that mutual funds should be run in the most honest, efficient and economical way possible. You could argue that that’s the callow idealism of a 21-year-old senior in college. You could also argue that it’s the grand design for Vanguard.”
The birth of the index fund
Vanguard cast its lot with indexing in August 1976 when Bogle launched the Vanguard First Index Investment Trust, later renamed the 500 Index Fund
which mirrored the performance of the S&P 500
A fund that matched a market average was then an untested and uncertain breed — Vanguard’s offering was the first retail product of its kind.
Index funds don’t try to beat the market or buy and sell the latest hot stocks. They own a representative sampling of all the stocks in an index and go for the ride. Their main appeal is the ability to capture nearly all of a benchmark’s return efficiently and inexpensively — which, as Bogle always pointed out, is more than can be said for most actively managed funds.
Said Bogle: “Why can’t managers beat the market? Where’s the value added? In terms of industrywide statistics, it’s just not there. One reason is because of cost. The cost is a handicap on the horse. If the jockey carries a lot of extra pounds, it’s very tough for the horse to win the race.”
For Bogle, the value of an index fund is not that it can beat the market — it can’t. Indexing, he explained, is a proven way to realize considerably all of the market’s pretax gains. Additionally, index funds eliminate much of the guesswork and specific sector and company risk involved with investing. And that, Bogle contended, is worth every penny: “There’s no point in being contrarian about something that doesn’t make sense. An index fund always wins. It wins every single, solitary day, and there’s no way around it. The fact that everybody criticized it made me all the more sure.”
The fox and the hedgehog
Defending the virtues of indexing against the powerful forces of costly active management was Bogle’s lifelong fight — his crusade, really — and he was always one to rally to the ramparts. “The foxes are trying to manipulate people; they’re trying to manipulate investing,” he contended. “Foxes charge a premium for their services, because it’s supposedly so complicated and mere mortals can’t do it. But the hedgehog says, ‘Of course mere mortals can do it. Just understand the one great thing: Own the market, and own it at a very low cost. And you will demonstrably get 98% or 99% of the market return.’ ”
Yet even Bogle admitted that active fund management has its place in a portfolio. Indeed, Vanguard — truly “The House that Jack Built” — offers a broad array of active products. He explained: “I don’t want to push my argument too far, because I think there is room for professional managers who don’t feel bound by style boxes.” Meaning, trailblazers who are sensitive to shareholder costs and taxes. He added: “The chances of beating a fairly measured market starts with having your expenses as low as possible. The active managers who will succeed are those with low costs, relatively low turnover and relatively low cash positions.”
To be sure, with so many investors trying to make sense of so many mutual fund and exchange-traded fund choices, Bogle often seemed a lone voice in the wilderness as he implored investors to build their portfolios on a strong, simple, foundation. Said Bogle: “Simplicity is the master key to financial success. The more complex the world around us becomes, the more simplicity we must seek in order to realize our financial goals.”
Bogle’s own simple approach to investing rested on a few well-honed beliefs:
• Investing is not as difficult as it seems.
• Consider index funds first.
• Own stocks, but hold bonds as well. Build a broadly diversified stock portfolio with mutual funds. This will help mitigate the specific risk of owning just a handful of stocks. Better still, buy the entire stock market through a total stock-market fund.
• Don’t own too many funds, and don’t trade them. Fund managers within a particular category tend to own many of the same stocks, so it’s easy to pay twice for a similar portfolio.
• Think long-term. Markets fluctuate, and these short-term ups and downs usually are just noise. So don’t lose sight of bigger goals.
Said Bogle: “Buy right and hold tight.”
Bogle remained modest about his significant achievements. “I don’t think I’m anything like a folk hero,” he said. “But there aren’t a lot of people like me in this business. Most keep a lower profile, are much more guarded in the way they speak, and much less strident in their advocacy of shareholders’ values and rights. If this industry had one fox and 1,000 hedgehogs, maybe I wouldn’t stand out. But if it has 1,000 foxes and one hedgehog, you’re going to be more distinctive. You carry a different set of values and investment ideas. If it’s unusual — even unique — you will stand out.”
Jonathan Burton is a MarketWatch writer and editor based in San Francisco.