Bogle on Today's Return Expectations

Dan Culloton: Hello. I am Dan Culloton, Associate Director of Fund Analysis for Morningstar. I am here today with Jack Bogle, founder and former chairman of Vanguard, one of the largest mutual fund companies in the world.

Jack, thank you for being here today.

Jack Bogle: Good to be with you Dan.

Dan: Several years ago, I think almost 10 years ago, you were at the conference and it was really near at the peak of the technology boom and people were really still very euphoric about the future.

And you were one of the few people looking at the yield of the market right now, earnings of the market, and the current multiple and saying, "Look. Equity returns are not going to be this robust going forward. In fact, you should have very modest expectations."

Looking at those same metrics right now, what can investors expect going forward from here?

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Jack: Today's metrics are the most difficult I have ever seen in my career. And that is because with all these enormous write offs and a whole major part of our economy, the financial system, going down in flames, requiring literally trillions of dollars of government aid, things we have never seen before.

We don't have any idea what earnings are, so how does anybody capture a P/E ratio when the earnings are either not there or totally suspect? Earnings are not coming through very well at all if you look at all the things that had to be written off, not only in the financial sector, but in other sectors, other corporations too.

Enormous amounts. I mean, for example, we look at the reported earnings of the S&P 500 last year as being only about $10 a share. That is after around $40 of write-offs. A bad decision is made by management, meaning the operating earnings are $50 a share.

So it is very hard to get a good metric there. I like to look at some different metrics. None of them are perfect. But if you get out of the current status of where things are and go again to the balance sheet, one metric I am fond of is how many dollars marketplace you pay for a dollar of book value, because these corporations have book value.

They have got assets and cash in receivables. They have got plant equipment. They have got research and development. And they have got a working force in place. They are an operating company; I don't know quite how to value that.

But in the market high in 2000 you were paying almost $6 for a dollar of real value, book value. Now you are paying about $1.80. So we know from that metric that values are near at hand relative to prices as compared to where they were then.

The big imponderable now I think is how long are we going to be in this terrible mess we have created? And I think it is going to be a while.

Dan: Well Jack, thank you very much for being here today. You have been very generous with your time.

Jack: Good to be with you, Dan.

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