The genius of John Bogle in 9 quotes
Reprinted courtesy of MarketWatch.com.
To read the original article click here.
It’s no surprise to note that John Bogle, founder of Vanguard and inventor of the index fund as we know it, is among the most influential investors of the past half-century. Bogle’s savvy wisdom is often distilled in quotable things he’s said and written. Today I’ll look at nine such quotes and add my (mostly favorable) comments.
Over the years, investors who have taken John Bogle’s advice have been practically guaranteed to miss out on being in the front of the pack.
On the other hand, Bogle’s disciples are quite likely, after 10 to 20 years, to have returns in the top 20% of all investors. That’s partly because index funds are unlikely to fall behind, and partly because so many other investors tend to trade in and out of the markets in counterproductive ways.
When Bogle first came on the scene with his new-fangled and inexpensive index fund that tracked the S&P 500 Index SPX, +0.53% he was regarded as a laughingstock in the industry. (That fund, once derided as “Bogle’s folly,” is now the Vanguard 500 Index Fund. It has about $260 billion under management.)
Everybody “knew” that active mutual-fund managers could — and usually did — outperform passive indexes. That was the whole point of having a fund: Hire a smart manager who knew how to pick the best stocks and when to buy and sell them.
But more and more evidence piled up to discredit that approach. Meanwhile, Bogle’s index-fund “folly” eventually came to be regarded as visionary leadership that would transform the investment industry.
Now for some quotes and comments on important topics:
Diversification: “Don’t look for the needle in the haystack. Just buy the haystack.”
That succinctly sums up the case for buying an index fund instead of hiring somebody to try to pick out gems.
Expenses: “The grim irony of investing is that we investors as a group not only don’t get what we pay for, we get precisely what we don’t pay for.”
In other words, every dollar you save by refusing to pay for an active manager is a dollar of return that belongs to you, not the manager. Reality turns out to be just the opposite of the marketer’s beloved slogan: You get what you pay for.
Market timing: “The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently.”
I actually know a number of people who can time the market, though not with enough accuracy to win a large following.
The biggest psychological problem with timing is that it makes investors’ returns look very different from the market, which is too stressful for many people.
The biggest practical problem with timing is this: Timing is likely to stop working if too many investors move in and out of the market at the same time. The very popularity of such a system would be its downfall.
In real life, that’s not a huge problem because timing is so emotionally tough that relatively few people will stick with it.
Trading volume: “In recent years, annual trading in stocks — necessarily creating, by reason of the transaction costs involved, negative value for traders — averaged some $33 trillion. But capital formation — that is, directing fresh investment capital to its highest and best uses, such as new businesses, new technology, medical breakthroughs, and modern plant and equipment for existing business — averaged some $250 billion. Put another way, speculation represented about 99.2% of the activities of our equity market system, with capital formation accounting for 0.8%.”
Stated simply, John Bogle is saying this: More than 99% of the activity on Wall Street essentially amounts to pushing poker chips around the table, with less than 1% aimed at creating new poker chips. That’s a sad commentary on this huge industry.
Index funds: “The index fund is a sensible, serviceable method for obtaining the market’s rate of return with absolutely no effort and minimal expense. Index fundseliminate the risks of individual stocks, market sectors and manager selection, leaving only stock market risk.”
John’s last point is important: There’s always risk that the stock market itself will leave investors with huge short-term losses. This is why I hold a significant part of my portfolio in bond funds — and it’s why that is recommended so widely.
Investing simplified: “Investing is not nearly as difficult as it looks. Successful investing involves doing a few things right and avoiding serious mistakes.”
This is a nice, pithy quote, and at first glance, I agree with it. Which is sort of ironic considering that I have spent more than half a century writing and speaking and teaching and advising in order to help people be better investors.
However, I think John Bogle has underestimated the challenges that investors face in the real world.
A partial list of the “few things” to “do right” would include managing your emotions, avoiding greed and fear, controlling expenses, properly diversifying your portfolio, maintaining patience and a long-term attitude, knowing where to place your trust, controlling your risk, having a long-term plan, giving up the urge to beat the market and knowing when to settle for “good enough” instead of overreaching in hopes of achieving the very best possible outcome.
Entire books have been written on the topic of “avoiding serious mistakes.” So investing is not quite as simple as he makes it out to be.
Time and patience: “Time is your friend; impulse is your enemy.”
Very well stated, and this quote needs no comment from me.
Stock-market risk: “If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”
While I must agree, I think 20% is a serious underestimate of the damage a serious market decline can do. The average bear market represents a loss of 35%. And in the decade ended in 2009, the market dropped more than 50% — twice.
I also think Bogle’s solution (“you shouldn’t be in stocks”) is a bad one. Almost every investor needs the long-term growth potential that comes from owning stocks. What investors need is a portfolio that also includes bond funds.
Another key is to teach investors to expect — and ride out — the normal cycles (sometimes pretty wild) of good and bad markets.
Trusting brokers: “It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.”
I think Bogle may have said this partly as a joke, knowing that there’s some truth in it. Here’s my translation: If you pay a high enough commission, a securities salesperson essentially is being paid to ignore the serious flaws of a product and to temporarily “forget about” alternatives that are better for the client but less profitable for the salesperson.
For more useful insights on investing, check out the free podcast of an interview entitled “Twelve investment decisions guaranteed to change your financial future.”
Richard Buck contributed to this article.