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Investing Insights: Remembering Jack Bogle

Morningstar.com

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Christine Benz: Hi, I'm Christine Benz. I'm here at the Vanguard Diehards Conference in San Diego, and I'm happy to be sitting here with Jack Bogle, who was really the epicenter of this conference. Jack, thanks for being here.

Let's talk about the current market environment. It's crazy. Give us your take on what's going on and what do you think investors should be doing?

Jack Bogle: Well, of course, I've only been in this business for 57 years, and I have never seen anything like it in my life. I've never seen anything like the amount of speculation that's going on in the market, which is basically twice as much stock trading, twice as much turnover as we had in 1929, the previous high.

We have these frequent days, we had 37 of them in the last year, where the market has gone up or down 2% or more. When I came into this business in 1951, we might have had three or four days a year like that, 12 times as many wild-and-wooly days as history would have said.

So, we've taken the whole focus of market participation in our capitalistic system here in the U.S. from one of investment to one of speculation.

I happen to think that's a tragedy in which the investors are the losers, and which of course, somebody is a winner: Wall Street wins. They make $650 billion a year in fees and commissions and all that kind of thing, which means that investors lose that much to the market.

So, it's a system that's crying out for change, although I never would have guessed the change would be so abrupt. I never would have guessed the speculation would have been so rampant. I never would have guessed that credit would be so easy. I never would have guessed that credit standards would be so devastatingly low.

Benz: So, what do you think are the solutions?

Bogle: Well, unfortunately, the one solution that we're going to get is government intervention, and I don't think there are very many people that really like or look forward to government intervention.

I don't know anybody that things the government can do a better job than private enterprises out of the system. Well, in the case of the financial system, they certainly can't do a worse job, but the government is the only vehicle, the only body, the only source of liquidity we have left.

So, the government has no choice but to intervene. This is in fact the greatest financial crisis since the great depression.

Benz: So, one thing I've been thinking about. If you are not a speculative investor, if you're a long-term investor, and yet there are these speculative investors buffeting your returns about, what should your reaction be? You'd be doing anything differently?

Bogle: I think basically you should not be doing anything differently. I mean investment is a pretty simple thing. Investment is owning businesses, or I would say being an inveterate index fund person owning all American business.

Owning every company in America, letting capitalism do its work. Those companies will grow at probably around 7% a year. They'll pay you at about a two and a half--somewhat lower than history, but a 2.5% dividend yield.

That should over time bail you out of anything that happens, because of the wild swings. I mean if you visualize investment as growing, and it's kind of a steady line, which it does, and visualize the crazy market as being all these jags up and down around this steady line, upward, upward, always upward I think.

Then you've got to say, "I know I'm not smart enough to get out at the high. I know I'm not smart enough to get back into the low, so I'm just going to stay the course," as we would say at Vanguard, and hang on through all that.

Importantly, if I'm trying to accumulate money for retirement, or to buy a home or to educate my children, what you want to do is keep investing and say, "How could I keep investing the day if the market goes down 600 points?" That's the greatest time in the world to invest, certainly better than doing it the day before it goes down 600 points.

I think people have lost sight of the fact that a sharp market decline is--of course it's bad for sellers, but it's good for buyers. Since the stock market is the interaction of sellers and buyers, it's always good for somebody.

Benz: Right. Just to switch gears a little bit, I know you have a new book coming out shortly within the next few months. It is called, Enough.

Bogle: Enough.

Benz: Tell us about the genesis of that book.

Bogle: Well, first it's sort of my critique of American society today, my critique of how we think about money, my critique of our financial system. My critique of what we've done to business, how we conduct business. In fact, how we conduct our lives.

It's called Enough: True measures of Money, Business and Life. It's a philosophical book. Of all the books I've ever written, it was the most fun to write.

Because I have a bill of particulars out there that I back up with all the facts that I have at my command to say we need to improve our whole society, not just the financial system, but the financial system represents, in a lot of ways, the worst part of it.

The title comes from a little sort of a poem that I read in the New Yorker two or three years ago and I couldn't get out of my mind. It's a story about Kurt Vonnegut and Joe Heller, the two famous authors, when Joe Heller was still alive.

Now, since he wrote it, Kurt Vonnegut has died. They go to a party in Shelter Island, lifestyles of the rich and famous kind of place off Long Island. Kurt says to Joe, "You see that guy over there, our host, billionaire host? He made more money today Joe than you have made on every copy of Catch-22 that has ever been sold."

As you know, Catch-22 is probably the most successful book of the post war generation. So, Joe Heller looks at Kurt and says, "That's alright, because I have something he will never have. Enough."

So, it's a little bit about thinking about what's really important in our lives, thinking about service to community before service to self. Thinking about our families, which I'm certainly not good at that, but I do my best.

Thinking about trying to build a better world, thinking about the greater good, rather than accumulating all the money or all the prestige or all the wealth, fame and power, that conventional definition of success that too many people are seeking.

Benz: So, teaching people how to redefine success in their own lives?

Bogle: Yes.

Benz: Sounds like a great lesson.

Bogle: Well, it was fun to do, a lot of fun.

Benz: Thanks Jack. We appreciate you spending the time with us today.

Bogle: Thank you Christine, good to be with you.

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Don Phillips: As a card-carrying capitalist, how do you feel about--or what lessons are there about capitalism from what's happened here, and how do you feel about the increased and expanded role of government?

John Bogle: Well, business brought it on themselves. This is certainly a crisis in capitalism. Judge Posner blames it all on the capitalistic system. He's the great Chicago School man everybody knows. University of Chicago Law School, Chicago Business School all teach us this.

The markets have to clear. They will produce great gains for us. Competition, free markets unimpeded.

So capitalism has basically failed us, and I think even worse--although Judge Posner does not agree with this--I think capitalists have failed us as well as capitalism.

I blame the capitalists actually more than capitalism, which gets to, Don, the endemic part of the system, which means that the idea that capitalism brought this crisis upon itself is even more acceptable, more understandable, in the whole scheme of things.

That is, these businessmen--take the bankers. All the other banks are doing these low loans, so their earnings are growing faster than ours are. So our directors and the analysts on Wall Street say, boy, you better get on the bandwagon and follow.

I've written on this in a number of different contexts, but it's a little bit like the old ethical standard. Think about this, all of you, if you would. There are some things that one just didn't do. That's the way I was brought up. It's not gray; it was black and white.

Now the ethical standard seems to be if everybody else is doing it, I can do it too. Carry that over into the banking. Everybody else is doing these funny loans and having earnings grow faster, building up their margins, leveraging those margins.

The more leverage A gets, the more leverage B feels inclined to get. So the system fed on itself and drove bankers to making decisions that they, presumably, should have known better than to make.

I don't--like Judge Posner does, however--I don't blame government for this. I was at a meeting of CEOs, even though I haven't been to one for quite a while, and someone asked me to sum up the morning. This was a bunch of bankers and other CEOs. They said, what do you think about all this?

I said, you know, what I'm hearing here is you're blaming the government for allowing you to do what you should have had enough brains not to do in the first place. I think there's a lot to that. So it's endemic to the system, and we have to learn to have a better capitalistic system.

I don't call it nationalism. Call it what you will, Don. If the government owns 35% of the bank, it's not their fault they own 35% of it. They had to bail the bank out. Frankly, other than the fiscal issues, I don't see any difference in having Washington, D.C., own 35 percent of Citibank than having Dubai own it except Dubai would drive a much harder bargain.

Phillips: Well, it seems at the end of the day, character still counts.

Bogle: Yes, character still counts, and we have lost a lot of that.

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Christine Benz: Jack, I know you are a big believer in holders of stock exercising their right to weigh in on governance matters vote against outlandish pay packages and so forth. A question that I have, actually my colleague Gregg Wolper raised it to me, is that, if indexing continues to gain traction as it has, does that sort of run at odds with the idea of governance and if the corporation knows that the passive investor doesn't have that ultimate weapon of walking away, can it just really ignore the index fund's wishes?

Jack Bogle: Well, I come to the exact opposite conclusion. This is what we call the Wall Street Rule, if you don't like the management sell the stock. We can't in index fund, cannot sell a stock. So, the only weapon we have, if we don't like the management, is to get a new management or to force the management to reform. To me, it's pretty simple, and its right out of Benjamin Graham's first book. What governance should do. What stockholders should do if the company is ill-governed? Take an active role. Nobody paid any attention to that advice, and they haven't yet. So, I'd say index funds are the great hope for governance.

Index funds are now about, in round numbers 22% of all equity fund assets and when you get to state and local governments and even corporate pension plans, indexing is probably every bit of 25% of all stock, and that's the only recourse we have. I suggested years ago, post-Enron, the formation of a group of long-term investors to get together and agree to some governance principles, not telling people how to vote, but to get involved in governance. It was very hard to get people even to talk about it.

Benz: Why is that, do you think?

Bogle: I think, it's -- first of all, there is no money in governance. You don't make more money by paying in a lot of attention to governance. Second, we run the money for corporate America, we institutional investors, and so, if we take on a corporation, somebody is going to lose that client, and so one doesn't want to take on one's biggest clients. Everybody says, 'Oh, we would never do that.' It's a pretty subtle thing, and it's hard to measure. But the fact of the matter is that there is no evidence by the way that this happens. That mutual funds or other institutional investors have a different stance on voting with clients as compared to with non-clients. But that's because we have no interest in active voting at all.

And it's not that if there is an active and inactive share, it's all inactive and bringing to mind the aphorism that I have used for a long time. And that is, from the fund managers perspective, pension fund manager, mutual fund managers perspective, there are only two kinds of clients we don't want to offend, actual and potential. That's a lot of clients.

So, if we start to gradually break down these walls, the corporate moats that protect corporations from their shareholders. I look at index funds as being right in the foreground. Think about the SEC proposal, which I think is very modest, but probably as much as we can do and therefore I'm for it. And that is get 3% of the shareholders together, 3% of the votes together, but only 3% who have held shares for at least three years. Where are you going to find institutional investors who hold shares for three years; their turnover is over 100%, that's one year, except for index funds? So, I think index funds are going to emerge as a powerful force in corporate governance.

Now, I am an optimist and maybe it'll take a long time to happen. But given the fact that indexing is; not may, but is, going to be more and more dominant with each passing year, there is no way around it, that's the mathematics that's all it is. Don't fight the math. Then indexing will get bigger and bigger and index funds will be called to the task and will measure up to that.

I have to tell you this, which is very disappointing, someone – I think it was a reasonable survey – took a look at all mutual fund managers to see how, what kind of scores they got in terms of activism in governance, and right at the bottom of the list were the three large index fund firms, and that would be Vanguard, that would be State Street and that would be BlackRock.

Benz: Can you speak to Vanguard's placement on that list?

Bogle: I don't know anything about it.

Benz: Okay.

Bogle: I had an idea at the beginning of the year, when the Supreme Court made this insane ruling turning over decades of precedent that corporations could give away money to make political contributions, unlimited political contributions. It's absurd on the facts. It's absurd on the principles. But I thought there would be some limitations, self-imposed limitations by having to disclose what they did. But I did do an editorial, an Op-Ed, that proposed that fund managers made the following proposal in corporate proxies, resolve that this corporation should make no political contributions without the approval of 75% of their shareholders.

And nobody paid any attention to it, nobody was interested in doing it, probably because I pointed out, it seemed obvious to me that they were going to put those things in shareholder proxies, corporate proxies, that we first ought to pledge not to make political contributions ourselves because we're corporations, too.

And that may have been the icing on the cake. But I haven't given up on that yet because, of course, as everybody knows, situation has gotten much, much worse because another Supreme Court ruling, which has allowed so-called 501(c)(3) charitable organizations, they can give half their money to political causes, just so long as they don't name the candidate or something very vague. I mean you can – it's so easy to help a candidate without using his name or her name, that now it's going to be anonymous, so that last fragile check on corporate largess is pretty much gone.

So, this is a bad era for corporate activism, but we're going to see how it works out, but the idea that corporations with these huge numbers of shareholders; they are going to be voting in the interest of their executives, not in the interest of their shareholders, and if exec compensation issues come up, that's how they are going to vote. And it's very serious, one of the most serious problems we have in financial America, and that is what we call the agency problem, and that is that corporate America is no longer controlled by investors, its controlled by agents of investors. Used to be that mutual funds and pension funds and endowment funds controlled about 8% of all the stock in America.

Today, they control 70% of all the stock in America. Corporate America will march to their tune if they just wake up and say, here's what you're going to do; I am going to tell you what to do. Think of the difference if Corporation X had a single shareholder with 70%; there would be no question about who is the boss of that corporation. Forget who is Chief Executive, he doesn't count, the boss counts and the boss doesn't need any titles, doesn't need to be the Chairman, the President and the CEO. He owns 70% of the stock, he is the owner. That's the mood I want to get our institutional investors in, and I will keep trying.

Benz: I am sure you will, Jack. It's always a pleasure to hear your insights and such a privilege to sit down with you today.

Bogle: That was great to be with you, Christine.

Benz: Thanks for joining us.

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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?

Jack 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.

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Christine Benz: Hi, I'm Christine Benz for Morningstar.com. The index fund recently celebrated its 40th birthday. I sat down with Jack Bogle, Vanguard founder, to discuss that milestone.

The index fund celebrated a big birthday, anniversary--whatever you want to call it, 40 years. Let's talk about that. This was your doing, and let's talk about whether the uptake of indexing was what you expected. Did you expect it to take off faster than it did?

Jack Bogle: I expected it to take off. Two things, one good--one positive and one negative. The negative, that I expected it to take off much faster than it did. It took 20 years until the mid-'90s …

Benz: Right.

Bogle: … for it to begin to gain real traction, and then it accelerated and the growth from 1995 to 2016 has been astonishing, and it's sustained and the cash flows are over 100% of the industry's. Vanguard leads in that, of course. And so, it's a lot of good for a lot of people. People say why doesn't everybody start an index fund? And I said the answer to that is very simple: All the darn money goes to the investors. This is a business …

Benz: The money is not in it for the …

Bogle: Yeah, they are in it to earn a return on the capital, particularly the capital that owns the firm, all those conglomerates that own these firms, and the mutual fund division of that firm or the mutual fund organization, it's a subsidiary, has to produce a return on the buyers' capital. And if you don't, the buyer will get somebody who will. I mean it's a hard--capitalism is a hard business. But the capitalism in our business should be focused on the shareholder who puts up the money, puts up the capital, takes the risk in order to get all the reward and he only gets about a third of it over time. So, it's amazing to think in this index boom, we have only one vaguely serious competitor that would be Fidelity, to Vanguard.

And of course, BlackRock is not as big as we are in indexing, but overall they're a much bigger firm than Vanguard, to which I have zero envy. Size is not a great blessing. Size carries with it a lot of administrative baggage, a lot of struggle to recognize the people that are doing the work around the company, and a lot of bureaucracy. I was telling someone the other day, Christine, that I've been worried about size, getting too big, for as long as I can remember.

Benz: Vanguard's size, though, has really been increasing exponentially over the period.

Bogle: Yeah, and I'm not saying we should stop it. I used to have these arguments with the directors about slowing down our growth. And they said, well, look, you do that and there will a be a whole lot of investors that deserve to be in Vanguard that won't be there. And so, in any event, I've been worried about it for so long and in a speech I gave in 1989 to the Vanguard crew, I said we're starting to get big and I hope we're very careful as we get bigger and bigger. I'll do my best to make sure that we always--that Vanguard is always a place where judgment has at least a fighting chance to triumph over process. And I talked about the perils of looking like a giant mutual insurance company, life insurance company, casualty company, which is impersonal and all rigid, bureaucratic, about the perils of getting anywhere near that. And when I gave that speech our assets were $47 billion. I'm not saying we should stop it.

I am saying we should be very focused on what we have within here. We have terrific crew members, a terrific crew, under Bill McNabb, great leaders, and I think they are doing everything they can, but size is a captivating, capturing kind of thing that grabs you a little bit more with each passing day. And we are still able to attract very wonderful young people and still able to retain terrific veterans. I go to a lot of these retirement parties, at 25-year parties, and my God, the quality of people we have here, they just people who are dedicated, they know what they're doing. They know about the company's values and they love the people they work with, their little teams all over the country, all over the company. So I'm wary of size and everybody knows that. I've said it so many times. It would be a little ridiculous to try and deny it.

Benz: Have you been concerned about the products that have cropped up outside of Vanguard mainly under the index umbrella that really don't, in your view, do justice to your original idea?

Bogle: Concerned, angry, astonished--there is a fringe element, it is almost entirely in the ETF industry. That's a marketer's dream. People who have no background in the business--Henry Kaufman caused them financial buccaneers--come into the business with a hot idea and they want to sell--I won't name any names--they want to sell whatever is hot. I have read interviews with these managers, in Barron's, kind of frightening. And they say, well, I know that Japan and Europe, two of their funds, are currency-neutral funds, aren't going to last forever, so we'll think of something else when they fail. Is that the way to be in this business, to market products? I don't even like the word product. I banned it here, actually, years ago, and it came back. You used to pay a $5 fine if you ever mentioned it. I didn't think we were manufacturers selling products. I thought we were trustees selling fiduciary services. People would say that guy is a real sap. And he probably is, but I have an idealistic view of the business.

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Kunal Kapoor: I remember Jack for many, many reasons, but most of all for his optimism and the fact that he really believed in helping the small investor and ensuring that that investor could have that great outcome that he or she was looking for.

Christine Benz: You could obviously fill books about Mr. Bogle's contributions to the financial services industry and to individual investors. I consider it one of the great privileges of my career that I got to meet Mr. Bogle through our annual Bogleheads Conference conversations. We would do video interviews. And I'll also say that as a young analyst reading Mr. Bogle, getting to know his philosophy was enormously clarifying to me as a young analyst. It helped shape the types of products that I would recommend, and also helped shape my career path. He was pro low-cost products of course, but he was also against so much of the complicated gobbledygook that Wall Street puts out. Hearing his philosophy was an incredible gift.

Ben Johnson: I don't believe that there has ever been, nor will there ever be, anyone who has given more to investors and taken less in return than Jack Bogle.

Jeff Ptak: His premise was the more that we can save investors, the more that ends up in their pockets, the better the outcomes they achieve. The fact that we now see millions of investors that are in index funds, including Vanguard index funds, I think stands as a towering monument to his legacy. It's immeasurable in the sense that Jack really changed the psychology of investing. His ethic was that you put the investor front and center where they belong. They don't subordinate to other business interests.

Instead you win when they win. That was not conventional wisdom in the industry some years ago when he was trying to popularize indexing and bring Vanguard up, and yet he inverted the psychology of the industry. He enshrined a new standard that put the investor front and center. I think we owe a lot to Jack, because now we see that sort of ethic, that sort of standard being table stakes in the industry. I think that all investors--not just Vanguard investors--all investors are better off for Jack's efforts. He's had an enormous impact, both in measurable and immeasurable ways.

Laura Lutton: One of the things that's so impressive about Jack Bogle was his unrelenting focus on the end investor, and he maintained that focus despite serious health issues and dust-ups along the way with other executives at Vanguard and so forth. I think when we look at the impact that he's had across his life, it's really tremendous, and we all have him to thank for that.

Alec Lucas: He didn't just pioneer the first index fund. He helped investors in all kinds of ways that get less recognition. He pioneered closure of funds to help protect current shareholders. He was an advocate in simplifying the language of prospectuses so that your average investor could understand them and make intelligent choices. He was a tireless advocate for others, and he will be sorely missed.