Why you should bet against John Bogle
Reprinted courtesy of MarketWatch.com. To read the original article click here I’m going to stick my neck way, way out this week and publicly bet against John Bogle, the inventor of the index fund, the founder of the hugely successful Vanguard Group firm and a prolific author.
Here’s an open letter from me to John Bogle:
Last month in an interview published in the Journal of Indexes, you said you would bet that over the next 20 years, large-cap stocks and growth stocks will do better, respectively, than small-cap stocks and value stocks.
You said you “would make a small bet” on that proposition, pointing out that “$5 is a big bet for me.” I’ll take that to mean you are wagering something less than $5.
Right now, I’m going to publicly accept your bet, because I believe you are likely to be wrong.
I want the two of us to be clear about this bet. Since your focus is exclusively on U.S. stocks, I believe you are predicting that over the next 20 years, the U.S. Growth Index will outperform the U.S. Value Index and that the Standard & Poor’s 500 Index will outperform the U.S. Small-Cap Index.
My own prediction, based on the probabilities from 89 years of stock market history, is the exact opposite: I believe the U.S. Value Index will outperform the U.S. Growth Index and the U.S. Small-Cap Index will outperform the S&P 500 Index.
Since Vanguard has index funds based on each of these indexes, Vanguard Growth Index Fund VIGIX, +1.26% Vanguard Value Index Fund VIVIX, +1.12% Vanguard 500 Index Fund VFINX, +1.20% and the Vanguard Small-Cap Index Fund NAESX, +1.22%it will be easy to know, in December 2034, which one of us is right.
So here’s the deal: If I turn out to be wrong, and I’m still alive in 20 years, I’ll double the somewhat timid $5 bet and pay you $10.
If the history of the past 15 years is any guide to the future (which of course is what you are betting against), you’re in trouble.
For the 15 years ended Dec. 26, based on Vanguard index funds, value outperformed growth 5.9% versus 3.4%. And small-cap outperformed large-cap 8.7% versus 4.3%.
Of course you knew this pattern when you made your wager. As you said in your interview: “For 90 years, they [value stocks and small-cap stocks] have been, on balance, the winning factors. There are extended periods when they didn’t win, but over the long term, they have won.”
And you made it clear you are making this bet because you believe the future — at least the next 20 years of it — will be different.
As you put it, “My experience is to be very wary of thinking of the past as prologue in the world of investing … the market is such a great arbitrage mechanism between the past and the future.”
Obviously the future could be quite different from the past. Nobody can know. But I’m very reluctant to bet against all that happened from 1926 through 2014.
If this were a wager about only a single future year, I’d be much less certain. When you study all the individual calendar years starting in 1926, you’ll see these two sides of the same coin:
- Growth stocks, which you favor, beat value stocks only 35% of the time, and large-cap stocks, which you also favor, beat small-cap stocks only 47% of the time.
- Value stocks, which I favor, won 65% of the time, and small-cap stocks, which I also favor, won 53% of the time.
While that gives me considerable comfort regarding value stocks, it’s a pretty close call for small-cap stocks.
However, John, you are betting not on just one year but on 20 years. In all the 20-year periods we can measure starting with 1926, small has beaten large 80% of the time and value has beaten growth every single time — that means 100%!
As I’ve written repeatedly, there are many things I admire about what you do and what you teach.
I like the fact that you clearly admit you don’t know the future. Your “small bet” of something less than $5 is most likely based on the fact you know there’s a high likelihood that you could be wrong. I’m in the same boat: I don’t know either.
If I knew beyond a reasonable doubt that value stocks and small-cap stocks would be the big winners in the future, I wouldn’t recommend (as I have for many years) that investors keep half their equity portfolios in large-cap stocks and a little less than half in growth stocks.
Even when we believe the future is quite clear, you and I owe it to the people who follow our advice to hedge our bets and to suggest investments that have a high probability of performing well.
We have different ways of doing that, and only the future will tell which one of us is giving better advice right now.
In this little bet, you are wagering $5 that the next 20 years of the market will be different. If it turns out that you’re right, then I’ll owe you a $10.
But even though I’m sticking my neck out pretty far on this one, I’ll go with the lessons of history and predict that the next 20 years will follow the market’s established pattern.
Let’s talk again in 20 years.
Richard Buck contributed to this article.