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Bogle: Nature of Market Unchanged by Indexing

Christine Benz

Note: This video is part five of nine of an interview between Morningstar's Christine Benz and Jack Bogle, founder of Vanguard, at the 2018 Bogleheads conference. Watch the other segments here.

Christine Benz: One question that you and I have talked about over the years is just the growth of indexing and the potential for it to make the market at large start to behave differently because so much money is in index-tracking products. I know you've said in the past you don't think we're there yet, but let's discuss your view on that topic. Has it evolved since we last talked? Or do you still think that indexing would need to get a lot larger?

Bogle: It's amazing to me. I was citing this statistic to the Bogleheads this morning, and that is, I did a study for the board of directors in 1975, and had the previous 35 years of large cap funds--that's what we had in those days, mutual funds compared to the S&P index--and the S&P index outperformed by 1.6% a year. In an article I wrote for the Financial Analyst Journal a couple of years ago, I updated that study and went 35 years up to 2015, the previous 35 years, and the difference was 1.6% in favor of the index fund.

So why is that? Because the cost of mutual fund management is about 1.6%. I'm oversimplifying, it's smaller at large-cap funds and bigger at small, but it's telling us what we should know: that the average manager is averaged before cost. How else can that be? It's a very competitive business, very smart people competing with one another, but it's hard to get an edge. 

I think there's very little evidence that indexing, even at 45% of the fund industry, has changed the nature of the market. I would add this: Supposing the market is less efficient and people will say, "ah ha," then managers can do well.

Benz: Active managers will have their day.

Bogle: Active managers. There will be a stock-picker's market, as they say. No, because if active manager A beats the market, active manager B will lose to the market. There's no way around the fact that that part of the market that's outside of indexing, if somebody does better relative to the market, somebody does worse relative to the market. 

As for a stock-picker's market, I never saw a phrase that seems to have such acceptance that meant so little when one thinks about it. Sure, there's a stock-picker's market, but every stock that's picked is unpicked by somebody else. Everybody that buys is buying from a seller. It's the simplest thing in the world that people don't seem to get. We're all consigned to average as a group. And when you take costs out, that's where the index advantage comes in.