Vanguard founder and former chairman Jack Bogle says the catastrophic economic consequences of the current downtown have caused Main Street acute pain at the hands of Wall Street.
Dan Culloton: Hello. I am Dan Culloton, Associate Director of Fund Analysis at 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 with us today.
Jack Bogle: Good to be with you, Dan.
Dan: Jack, you are well known for starting Vanguard, for starting the first retail index mutual fund and...
Jack: First index mutual fund, period.
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Dan: First index mutual fund period, and for having a very long career of advocacy on behalf of the individual shareholder. But you are also one of the few people around in the investment industry who has seen a lot of the bear markets that this past one that we have been through have been compared to, including the Great Depression, which you were born on the cusp of.
I wonder if you could talk about and compare what we have been through to some of the past recessions, depressions, and market breaks that you have seen in your lifetime and career.
Jack: Well, considering I was only about three years old at the bottom of 1932, I am not sure any comments I had about that would be useful! So taking the others, this is the worst I have seen in my entire business career.
It happens to be the sharpest market decline, the biggest. We had 50% declines roughly in 1974 to '75 and again in 2001 and 2003, really. This has been around a 55% decline; very big.
But much more than that, this one seems to have had much more catastrophic, maybe economic, consequences. The financial system misdeeds are flowing over into the general economy in a way that did not happen in any major way in 1973, '74, or in the break at the beginning when the tech bubble burst at the beginning of the 21st century.
So this is the worst break measurably, but it has also created the most difficult economy of all of them. So the pain caused by the disgraceful behavior of so many in the financial system has spread over to very innocent people. Wall Street taking advantage of Main Street; this is probably not the first time it has happened in human history, but it has not been a very happy chapter in the history of the financial business.
Dan: It is interesting. In some of your recent books, "The Battle for the Soul of Capitalism" particularly, you talked about how institutional shareholders, mutual fund managers in a lot of ways were culpable for the tech bubble bust for not acting more like owners.
It seems like that was at play in this recent catastrophe as well. To what extent are mutual fund managers, institutional investors, investors in general responsible for what we have seen happen in the financial sector?
Jack: Well the managers really have to take a huge share of the responsibility, really in two different ways. Think about this for a minute. And that is in the tech bubble, the Internet bubble, the information age bubble.
We were all too quick to jump on the bandwagon, using a whole lot of mathematical projections. There were companies that were selling at multiples of revenues. We didn't even have a price to earnings ratio; we had price to revenue ratios and were using mathematical formulas to extend them in the future.
And then our buying, particularly in the mutual fund industry, of these hot stocks led them to go higher, and that led momentum players to come on and all that.
What happened this time in the most recent collapse was, I think, a failure in analytic failure on the part of mutual fund professional investors. And I should say, much more than parenthetically, that just about all mutual funds are also managing pension plans and almost all pension managers are managing mutual funds, so it is not a division you need to worry much about anymore.
But the analysts did not live up, I think, to their responsibility to analysis, to do careful research. They were very quick to look on the P&L statement, which is a statement of profit and loss, and they want a certain amount of earnings growth and the company executives feel obliged to provide it.
But they paid very little attention to the balance sheet. And if you are a traditional person in investment and finance, the balance sheet is where you begin, not where you end. And in the case of the mutual funds, they never even got there, by and large. They didn't analyze the balance sheets. They looked solely to the statements of revenues and expenses.
Dan: Are we learning the right lessons, or have we learned the right lessons yet from this recent debacle?
Jack: Well, the reality is that extraordinary popular delusions and the madness of crowds goes back to ancient Greece. We make essentially the same mistakes over and over again.
So while this generation, if you will, may learn, the next generation will not have that learning background. I think everybody should spend a little bit more time on history. I know I like to do that myself; look at how things have been in the past, read things that have been written in the past.
History does not foretell the future, but it certainly can suggest the kind of mistakes that have been made in these times of boom and times of bust in the past.
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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