John Bogle on Investing: The First 50 Years
John C. Bogle
“The one great secret of investing is that there is no secret.”
“Investment success, it turns out, lies in simplicity as basic as the virtues of thrift, independence of thought, financial discipline, realistic expectations, and common sense.”
John C. Bogle, whom I greatly admire, founded Vanguard investment management company, a mutual fund company owned by its shareholders. He pioneered the no-load mutual fund and the index fund. These two ideas have made it possible for the average person to be in charge of their investments and do better than any of the Wall Street professionals that make up the financial establishment.
A no-load mutual fund is one that charges no sales fee or commission, either to buy or sell the funds.
An index fund is one that is managed to match the performance of a broad market index, such as the S&P 500 Index or the Wilshire 5000 Index for stocks. There are bond indexes, too. Investing in an index mutual fund is like buying everything (“the haystack”) instead of searching for needle.
Actively managed funds employ high-powered investment professionals who use many different techniques to select securities that they believe will perform better than other funds. It would seem that these funds should do much better than the passive index fund strategy. But the results don’t show this to be true. That’s what Mr. Bogle means when he says there is no secret.
For the period 1987 through 1997 (this is from a speech given in 1999), Morningstar selected what they term the equity fund “Manager of the Year.” For these managers, not even one of them beat the S&P 500 Index in the following year. Not even one was able to turn in an above average result.
From 1993 through 1998 the New York Times asked five investment managers to manage a hypothetical portfolio. The portfolios started with $50,000. At the end the average advisor portfolio grew to $103,500. Does that seem like a lot of growth? Most people would probably be happy with that. But the market average, as represented by the S&P 500 Index, grew to $156,100 over the same period.
Any comparison of index funds to actively managed funds will show that, over time, the index funds do better. For short periods, some actively managed funds will do better than the index funds. The problem is that we don’t know which funds will do better.
Why do index funds outperform actively managed funds over time? The answer, according to Mr. Bogle, is costs. Investors pay costs in the form of sales charges or loads when they buy (and sometimes when they sell) funds, actively managed funds often have some portion of their assets held as cash reserves, actively managed funds incur high transaction costs as they buy and sell securities, and actively managed funds usually charge higher management fees. Plus, actively managed funds can generate tax bills for their holders, too. These costs substantially reduce the return to investors in actively managed funds. The tyranny of compounding tells us that even small differences in returns can make huge differences in the amount of money one can have as they start retirement. An investment in the S&P Index would be worth about twice as much as an investment in the average equity fund over the period 1949 to 1998.
The innovations that Mr. Bogle has been responsible for are invaluable. The collections of speeches in this book are fascinating to read, and following the advice in them will lead to a lifetime of success in investing. It is not, however, the same advice you’ll get from a stockbroker or from most financial advisors.