Bogle: Speculation Is in the Driver’s Seat

Christine Benz: Hi, I'm Christine Benz for Morningstar. Investors have been on a wild ride recently. On the phone with me to discuss what investors should make of the markets' recent volatility is Jack Bogle. He is the founder and former CEO of the Vanguard Group. Jack, thanks so much for being here.

Jack Bogle: Always good to be with you, Christine.

Benz: So Jack, I am hoping we can talk about the recent volatility in the market. There have been some signals that it's been driven by this high-frequency trading that has really picked up steam. What's your take on some of those technical factors that could be influencing the markets' movements?

Bogle: Well, we moved into a market very clearly now where the volumes are enormous, and it's therefore a market where in recent years--it reaches a peak and then trails back a little bit, but it stays at very high levels--speculation is in the driver's seat. This is short-term speculation and all its follies, and long-term investment with all its wisdom is kind of back in the rumble seat there somewhere forgotten. So my advice to an investor would be first decide whether you're an investor or speculator, and if you are an investor, I try to ignore all this noise. It's as I've often said quoting Shakespeare, it's a tale told by an idiot full of sound and fury signifying nothing. And again, that's just what I see in the market today.

Benz: Do you have any thoughts on how those speculators could be curbed and whether the regulator should be looking at curbing high-frequency trading for example?

Bogle: Well, I'm not expert on that. I think the general consensus among money managers is that through this momentary a hundredth of a second or thousandth of a second and the kind of advantage they seem to be able to get, they're operating against the interest of a typical individual investor out there. And the market is supposed to be open to all participants, no one is supposed to be able to get an advantage. And they seem to be able to be doing that. There are a few people in our industry, some of the best people in our industry like Mason Hawkins at Longleaf, have taken a very strong stand against it. But it's not easy to regulate the functioning of markets. We all know and I couldn't agree more that the market should basically be free, but if someone's going to come in and interfere with the free functioning of the market, whether it's inside information about trading volume where it's coming from, or whether it's as we've seen some notable hedge funds, or just inside information about what companies are going to report in the way of earnings or whatever else it might be, then the markets also have got to be fair. And we need, I guess, King Solomon to write that particular regulation.

Benz: How about the role of exchange-traded funds in recent market volatility? I know you've been outspoken about the growth of ETF's and the potential for investors to hurt themselves with ETFs. How has your thinking evolved there?

Bogle: Well, we're taking a look right now at the difference between ETF returns, mutual fund returns, and the returns of the index they track. But the ETF at the margin now has grown I think completely off the wheels. These triple-leveraged up or down market funds are totally speculative thing. ETFs are a great marketing business, and it doesn't look like it's much of the business for investment management for doing a good job for investors. The idea of an accurately managed ETF strikes is absurd. I mean, if it's hard enough to time the market minute by minute, second by second during the day, and let's say the total stock market, what's the point of trying the time what a manager is doing minute by minute? How would anybody have even a clue to that, whether it would be any different or not?

So it's become a "new product" business where the money seems to flow to whoever has the hottest new idea and not the best idea, and it's added a lot to the huge amounts of speculation in the mutual fund industry. I mean, the S&P SPDR turns over about 10,000% a year, and I guess that makes the typical mutual fund turnover 100% a year and not look so bad. But they're high-turnover funds.

The basic idea of the ETF is not a bad idea. It's the same indexing idea; buy the total stock market, buy the total bond market and hold them forever and you could do that just fine with an ETF, which I don't need the opportunity to sell it at 11:31.208 p.m. or a.m., I guess. I always thought a mutual fund was fine. You could get your money out every day. I thought that was quite remarkable when I first looked at this industry back in 1951, and the close of business everyday is deemed not good enough.

If you want to get out now--now--in this age of technology, just push a darn button and you're out. But that has nothing to do with investing and everything to do with speculation. So technology is aiding and abetting this cloud psychology syndrome that we're dealing with.

Benz: Jack, thank you so much for sharing your insights. It's always a treat to hear from you.

Bogle: Good to be with you, Christine.

Benz: Thanks for watching. I am Christine Benz for Morningstar.com.