A Love Letter to Jack Bogle

In this installment of Rule Breaker Investing, David Gardner turns his attention to the founder and former CEO of The Vanguard Group, Jack Bogle. Tune in as David shares some of his favorite moments and quotes from the man who brought index funds to the general investing public.

A full transcript follows the video.

This podcast was recorded on Dec. 14, 2016.

David Gardner: Welcome back to Rule Breaker Investing. I'm David Gardner. Happy December to you. Had a lot of fun last episode talking about the five stocks to put under the tree and the conversations that you should have with your child as you give each of those, and I hope you do give some stock, or consider giving some stock.

Just to hit that drumbeat one more time from last week, there are the gifts that are the tangible things. Those are toys and other things that we grow up expecting, as kids, and get a lot of the time if we are fortunate enough. And then there are the intangible things like, "Hey, I set us up at a restaurant and a play," or just a nice note from somebody. Or experiences. A trip that you take to the museum with a grandparent.

And then the third category is the gift that keeps on giving, and that's really what I see as stock. So you can open up an account for a child. You can make it a gift tax account, and you can fill that account with a stock or two (or five). Listen to last week's show for thoughts on those.

Well, last week I mentioned that I was excited this week to talk about one of my favorite living investors. I didn't mention who it was, so surprise! It's Jack Bogle. Now, a lot of you probably know who Jack Bogle is. After all, I think of him as one of the living titans of the investing world. Jack Bogle who -- it's funny to think. The first time that Tom and I saw his work (my brother Tom and I), as we were writing up The Motley Fool Investing Guide, we were actually a little critical of Bogle just on one point, and this remains 20+ years later the only point that we really disagree with Jack on.

And it's that we think that picking stocks does matter. That you will be rewarded for picking this stock, not that one. And Jack's entire career is premised on the idea that that's not worth the effort and, in fact just getting the average, at a low fee, for the vast majority of us is the single best thing we can do for an investment plan for the long term.

And really, even though Tom and I obviously disagree on that one point, we agree on almost everything else with Jack Bogle, and I think we've helped promote the Vanguard Index Fund for 20+ years, now, through our books, etc., because we have often said, "Now, if you don't have energy, or confidence, or interest in picking stocks, darn it, one of the best things you can do is open up a Vanguard mutual fund account."

So I make this episode my Love Letter to Jack Bogle. Jack has become a friend of the Fool over the years. We're going to play some clips a little bit later in the show put together by our talented producer, here, Mac Greer, here at the Fool. Mac having booked Jack Bogle maybe more than any other guest in The Motley Fool Radio Show and podcasting history. So we have some good stuff to share with you in a little while.

And I want to get started just reading a short biography of Jack Bogle written by Robert Brokamp of Motley Fool Answers fame. I hope you enjoy Motley Fool Answers as much as I do. Another great, regular, weekly podcast here at The Motley Fool. But Robert has followed Bogle for a long, long time, and I think it's important, since not everybody does know who Jack Bogle is just to set some context, and that's what this does. So here's a little bit about Jack Bogle from my friend Robert Brokamp, and I quote:

"It may seem odd that I consider someone who encourages investors to match the market, rather than try to beat it, to be among the greatest investors of all time," Robert wrote, "but no one has done more for more investors than John Bogle. Early on Bogle recognized the difficulty the average mutual fund would have in beating the market. While a senior at Princeton in the year 1951, he wrote a thesis called The Economic Role of the Investment Company, in which he said that funds can make no claim to superiority over the market averages, and that management can scarcely be expected to buy so that the fund can stay ahead of the market when the very securities that it buys are a part of that market."

"He wrote that a fund's management should operate in the most efficient, honest, and economical way possible. That, again, all from an undergraduate's thesis. After college Jack Bogle joined Wellington Management, working his way up to a top leadership position, but in 1974 he was fired after an ill-advised merger, so he founded The Vanguard Group which had, and continues to have a mutual ownership structure; that is, the company is owned by the funds, which in turn are owned by the shareholders in the funds."

"It was the very first no-load; i.e., no-commission fund company. Until Vanguard came around, investors had to pay an up-front commission of sometimes up to as much as 8% to get into a mutual fund. Well, then came the launch of the first index investment trust (that was in August of 1976), which was the first publicly available S&P 500 index fund." I should note, I guess, that's 40 years ago this year.

"The banks that managed the initial offering hoped to raise $150 million at launch, but raised just over (we've all had moments like this) $11 million. Eleven [million] of the hoped-for $150 [million]. Bogle was urged to close the fund, which was derisively dubbed Bogle's Folly, but he persevered and the fund, now named the Vanguard 500, (VFINX is the ticker) is the biggest stock fund in the world. It also consistently beats the overwhelming majority of other large-cap U.S. funds, not to mention many individual stock pickers."

"And as for Vanguard the company," Robert concluded, "it now offers more than 200 low-cost funds and ETFs, and is the second-largest asset manager on the planet behind BlackRock."

So there's a short view of Jack Bogle's career and what he's done, and before going to some clips of Jack speaking to my brother Tom and me over the years, I want to say a few things that I personally appreciate about Mr. Bogle. I'm going to do that in a second.

I do want to mention one new introduction this month. In fact, this is a brand new product at Fool.com, and I hope you'll take a look because it's got my name on it, in part. It's Motley Fool Explorer, and it's our newly available solution designed to help investors understand today's most exciting and relevant trends while providing in-depth and actionable monthly recommendations.

Now, I think a lot of you are familiar with Motley Fool Stock Advisor and/or Motley Fool Rule Breakers. I sure hope you are. After all, the name of the podcast is Rule Breaker Investing, as well.

But Explorer is actually built slightly differently. It's built around what we call "monthly explorations." Those are tournament-style competitions in which our Explorer investor team researches and votes on the stocks that they believe offer investors the best opportunity today. So one month the team may focus on virtual reality. The next maybe biotech or driverless cars. It goes like that. Even just a group of stocks, sometimes, that the market has recently punished. It's kind of like the group of stocks that I'll pick every two months or so right on this podcast, except that it's every week, every month.

So regardless of the topic, Explorer's goal is to show you where the world is going and how you can build your portfolio to reflect that future. I hope you'll take a look at Motley Fool Explorer. It's open for sale right now on our site this month.

So three things I want to share -- three little paragraphs in my love letter to Jack Bogle. The first one is probably the most obvious one, and that is just the invention of the index fund and how much it's done for how many people. Just think about a billion blooms blooming.

I mean, how many dollars; how many families; how many people have had better investment returns with confidence because they were working with Vanguard over the last 40+ years. It's a remarkable story. As many people as Warren Buffett has reached with his message of good capitalism, long-term-minded patience, good old-fashioned country wisdom, and, by the way, the richest investor of our time. As many people as Buffett has reached. As many people as Peter Lynch reached. Maybe an era a little bit earlier, when I was coming of age, Peter Lynch was a great influence for me.

But I don't think anybody -- I don't think either of those gentlemen (two of our favorites, here, at The Motley Fool) -- can touch the influence that Jack Bogle has wielded over the investment world. It's not just that he's always been a reformer. That he's always tirelessly worked for the common man and for uncommonly good returns for the common man. But I think it's that he's reached so many. He's really democratized investing through the index fund.

And just to cue up our first clip, we had one of our in-house opera singers (this is from our radio show The Motley Fool Radio Show) 15 years ago or so, because we thought we have to capture this. It may not be as great as 'O Sole Mio, or another great aria, but for the investment industry, they needed to hear this:

[Curtis Shoemaker]

Ah, yes. That was our former employee, Curtis Shoemaker. Curtis -- these days -- I've seen him on Netflix on a show or two. He's made some movies since his opera aria cameo through The Motley Fool Radio Show, but we figured nobody is really getting the message out there that index funds do beat mutual funds, so darn it, let's put it to music. A Foolish memory of the past.

But that's my first point of appreciation about Jack -- just, they do. Index funds beat so many mutual funds. Eighty percent of managed funds, each year, typically will lose to the index fund and then the next year they might beat it, but then three years later that same fund is behind it. So the 20% that beat the index fund every year don't necessarily recur. There are some good managed funds out there, but index funds beat mutual funds.

OK, point number two of appreciation and love for Jack Bogle is I love the way he calls out his own industry, and I don't just mean Wall Street, which he's called out many times before, and memorably especially during the financial crisis, the Great Recession of 2008 to 2009 about which we will say a little bit more later. But it's actually the mutual fund industry itself that he has sometimes bedeviled.

And in particular -- and this is a point of mathematics that I hope I can convey to you who are listening, whether you consider yourself mathematical or not. For years, Bogle has called out the mutual fund industry for not reporting its returns post-distribution. What do I mean by that? We'll get to the math in a sec, but first let's define our terms.

So every year your mutual fund manager (if you have a mutual fund) is cashing out some winners and some losers and, net-net, if it's been a good year cashing out more winners than losers. As that mutual fund manager trades out of one stock into another -- which, by the way, I think Bogle, and the Fools, and many others agree happens a little bit too hyperactively -- as your mutual fund manager sells that stock to buy another, guess who gets the capital gains tax at the end of the year?

You, of course. It's your money he or she's investing, And so it's distributed to you and you are paying every single year (holding especially managed mutual funds), which turn over in kind of a turbocharged manner really relative to most index funds. Those managed funds give you a tax bill at the end of every year that you have to pay.

And what is happening when you're seeing mutual fund returns printed and advertised is it's not including the turnover that is occurring in the fund and the taxes that you're paying. So what looks like a 10-year run where the S&P 500 was up 125% and your fund (I'm making this up) was up 120% -- a few percentage points behind the market because most are -- that 120% that's being advertised [is] not your actual return if you're invested in that fund for those 10 years. It's well below that. In fact, it's sometimes about half of that after you're paying taxes, each year, because of your overactive, managed fund manager.

So this is a key Jack Bogle point. I tried to throw some math at you, there, but I hope you understand the concept, and the industry has been loath to really represent truly the returns that you and I get if we hold those funds over those periods of time. So that's point number two of love and appreciation for Jack Bogle.

And how could I not close -- before cueing up the rest of our clips this show -- how could I not close with how he has made moral character a component of his life and his work. He is an exemplary gentleman himself. He always has been. I'm sure he's made mistakes. So have we all. But Jack Bogle -- a number of his books are just about character. I think one of his books (that I still have on my shelf [and] I haven't read this one) is just called Character Counts.

So here we have somebody writing from (seemingly from a perch somewhere around Wall Street, although it turns out it's much closer to Valley Forge, Pennsylvania than New York, New York), and he's writing as much about acting properly, and thinking properly, and with the wisdom of many past greats. But here from the money industry, he's helping you and I think through the consequences of our activities and be better people as a consequence of that.

And just to close that one out on a personal note, speaking of personal notes, I have one from him dated October 23rd of 2015 (so this is about a year ago), and he had just spoken at Princeton, his alma mater, doing a seminar entitled "Business Ethics and Modern Religious Thought." That was Jack Bogle's seminar title. He wrote me, humorously as he always does in parentheses, "I'm strong on the former; weak on the latter."

But why did I get this note? Because that day in his class was my daughter Kate who graduated Princeton earlier this year, and he took the time out to have a photograph especially taken with just him and her, and sent me this lovely handwritten note and a picture that we'll always treasure. And he didn't have to do that, of course, and I'm sure he's far busier than we are (well, at least he's far busier than I am). And it just is a testament, again, to the character of the man that he does things like that ... and not just for me or for you ... but for many, many people over the course of his life. So we have all been blessed, and I think I've led a much happier life because Jack Bogle is on this Earth.

All right, those are my personal notes of appreciation. The love letter continues. Now, I've shared a little Robert Brokamp. I shared a little David Gardner. But now I'm going to share Jack Bogle, because he's the one who's the most eloquent voice to hear on this show and we're going to feature him. So I've got a number of clips cued up. I have them ordered. And before I do that, I have to pay the piper.

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Gardner: OK, I mentioned earlier that Mac Greer, our longtime producer here at The Motley Fool, took some time over the last week or two to listen back through all the Bogle interviews that we've done (both my brother, Tom, and me). No doubt some Robert Brokamp. Jack has come and spoken at the office before. Mac, you've listened to a lot of Jack Bogle and you took the time to come up with -- we're going to go with six clips -- and I'm just going to play them and then react to each of them if I have a little something to say.

So the first one is, I think, one of the points I've tried to make repeatedly on this show ... the importance of getting started as early as possible.

Jack Bogle: I think understanding compound interest will do more for the education of American youth than a thousand stock-picking contests.

Gardner: Which, again, isn't to say that stock-picking contests aren't fun and valuable, because I think using Motley Fool CAPs, for example... It's a great, big stock-picking contest. I love it. But I think the point is clear, and that is that the earlier we can get kids going and thinking about compounding...

And I'm certainly a critic of some of the stock-picking contests where you're in there for one month competing against your classmates, and the person who wins usually is loaded up on a single stock, and it might have been a penny stock. It doesn't really teach -- I think Jack would agree -- it doesn't really teach great investing acumen. It doesn't get you conditioned to be a long-term thinker.

Then again, I don't want to gainsay the efforts made by many social scientists, teachers, and others who would introduce these as a brief plug-in to a course. I appreciate, really, any exposure the stock market gets. But Jack makes the important point, there, the earlier you start that compounding clock in your life, or the life of anybody connected to you, the better and richer you all will be. And so there's always carpe diem running underneath anything we're talking about when we talk about investing and the preciousness of time, here, at The Motley Fool.

Now clip number two is a story. It's actually a metaphor that I, myself, have swiped from Jack and told any number of times over the last 15 years. It's the Rowboat Syndrome.

Bogle: And you're your own worst enemy. You're bullish when the market's at an all-time high and want to buy. You're bearish when the market's at an all-time low and want to sell. Well, if that isn't a sure way to lose money, I wouldn't know what would be. Visualize somebody sitting in a rowboat, rowing away at top speed. He knows absolutely exactly where he's been and has no idea where he's going.

Gardner: Because he's looking backwards sitting in the rowboat.

Bogle: He's looking backward. And we all do that, and that's the emotion of all the emotions we really ought to get out of this.

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Gardner: And it's a great metaphor, and I've used it to really kind of illustrate this primary point ... why people buy high and sell low. And let me just add a little bit in about that right now.

So what we do is we paddle down the river of life. If we're in a rowboat, we're looking backwards as Jack so eloquently said. And if that's what we're doing as investors, it usually sounds something like this.

"You know, I admit it. I haven't got started investing. It's taken me a while, but I've been listening to the podcast, or I've tapped into Fool.com. I'm finally ready to get started." And usually what's happening to that person -- there's a little bit of a subconscious thing going on where the market's probably been pretty good -- and so that's why they feel like they've missed it and they need to kind of finally get onboard with it.

And unfortunately, that's often maybe at the point the cycle's about to turn. So paddle, paddle, paddle. Looking backwards, that person finally gets started investing and buys. And what's about to happen? Well, the average bear market lasts ... I think the average is actually under a year. Some of the longest bear markets aren't nearly as long as we think. Maybe three years, if you're actually talking about the actual drop of stocks, is about as long as any of them ever get. So somewhere around six to 18 months later, this person who was enthusiastic finally to get started is now disconsolate. Paddle, paddle, paddle looking backwards. Looking backwards at a market that might have given up 20% of its value over the last 11 months.

And so what does that person do? Well, unfortunately that person sells, he or she thinking at that point, "You know? I probably should never have gotten started. I finally did it. I invested. And look what happened. My hard-earned savings are now less because I invested. Maybe I don't really know what I'm doing," and so that person paddle, paddle, paddle sells. And that's why, as Jack Bogle has taught us, people buy high and sell low.

So what I've often said in conclusion is toss away your paddle and get out of the rowboat. Why not take a sailboat, instead? And to me, the sailboat is that 9% to 10% annualized returns that the stock market has given you if you just let it. If you just sit there in the boat, have a good time, go faster with a lot less effort. Clip number three:

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Bogle: As I said in a thousand different ways on different subjects, and often to my associates here at Vanguard, if there's a gap between perception and reality, it's only a matter of time until reality takes over.

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Gardner: Speaks for itself. All right, clip number four was when we asked Jack what he'd like his legacy to be. Keep in mind we asked him this somewhere around the year 2003, so I hope he'd still give a similar answer here in 2016. I'm just glad he's still with us 13+ years later. Go, Jack.

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Bogle: My outlook is sunny. My optimism is great. My idealism is greater than when I first got into this business 50 years ago, fifty-two years ago, and I'm a lucky guy. And if I can help investors do a better job, help this industry do a better job (although the industry won't consider it as help), I'll go to my reward with a smile.

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Gardner: And all I really want to add to that one is that Jack Bogle was born on May 8, 1929. What a year to be born -- May 8, 1929 in Verona, New Jersey, so as we close out the year 2016, Jack Bogle is 87 years young.

Clip number five. I think, Mac, you selected this because it's a great example of Bogle's humor. Anytime you spend more than five or 10 minutes with Jack Bogle, you'll discover two additional things. One, he has a great sense of humor. Two, he's a storyteller, so you'll probably hear a funny story from him within your first five or 10 minutes of encountering the man.

So we had a fun format that we used on The Motley Fool Radio Show. We continue to do this in some of our podcasts, and we might even bring it back to this show at some point, because I always loved it, and it's the Buy, Sell, or Hold segment that we do. So we would have bright lights like Jack Bogle on the show and we'd ask them not about stocks, but maybe trends, or things happening in our culture, or people, and ask if they were stocks, we would say, "Buy, sell, or hold?" So this, a little bit more extended clip, is Jack Bogle playing our Buy, Sell, or Hold game with my brother Tom and me, and the subjects are Warren Buffett, cheesesteaks, and Britney Spears.

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Tom Gardner: OK, let's start with buy, sell, or hold Warren Buffett?

Bogle: Buy. He's a fundamental value investor. He would diversify a portfolio of U.S. stocks because he has some high-grade stocks in there, but has also done very well over a long period of years in insurance company holdings. He's more of an insurance company than he is a U.S. stock investor, now.

Tom Gardner: OK, Jack. You live in Valley Forge, Pennsylvania, in the area. Buy, sell, or hold Philly cheesesteaks?

Bogle: Uh, hold Philly cheesesteaks.

Tom Gardner: OK, why are you holding?

Bogle: Well, I'm holding them only if you don't have heart problems, because they've got (a) cheese and (b) steak. And I would say the cholesterol lovers -- those that can handle it, anyway -- should be entitled (they're delicious) to a good Philly cheesesteak, but I'm not putting it on buy because you might do it more than, say, once a month.

Chris Hill: OK, John. Our final one. Buy, sell, or hold teen pop sensation Britney Spears.

Bogle: Well, I would sell Britney Spears.

Tom Gardner: OK, let's hear why.

Bogle: Well, she's a little sultry for an older fellow like me. A little goo-goo eyed. And, you know, I don't know. She's displaying a certain amount of virtue that we didn't use to see on the stage.

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Gardner: Oh, that still makes me laugh. That was Chris Hill. I'm sure you recognize Chris's voice if you're a Motley Fool podcast listener. You know, back in the day, Chris was a co-host of The Motley Fool Radio Show before we all moved on to the podcasting goodness we bring you now in 2016.

And the last Bogle clip is him telling the story of how he named his 2009 book Enough -- how he named it Enough.

Bogle: Kurt Vonnegut and Joe Heller, the author of Catch-22, of course, are going to a party in Shelter Island, that lifestyle for the rich and famous, and socially prominent place off Long Island in New York to a party given by a billionaire hedge fund manager.

And they get into the party and Kurt says, "Joe, see that guy over there? He's a hedge fund manager. A billionaire. He made more money today, just one day, than you have made on every copy of Catch-22, probably the biggest book of the post-World War II generation, ever sold. He said he'd made more money than you on every book, every copy of Catch-22 that's ever been sold."

And Joe Heller looked at Kurt Vonnegut and said, "That's OK, because I have something he will never have. Enough. Enough." And that's where the story comes from.

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Gardner: And in this season of Yuletide, the season of plenty and abundance (I hope it is for you), it's awfully good to be reminded of that.

Well, thank you Jack Bogle. Thank you for what you've meant to The Motley Fool. I want to welcome in Motley Fool producer, Mac Greer. Mac, first of all, this is the month of gratitude on Rule Breaker Investing and I want to thank you. I want to thank you for the time that you put in to sift back through certainly a lot more Bogle clips than we could actually play on this show, but for all the work that you did not just in the last two weeks, but how about the last 15+ years or so that we've worked together when you've had, and booked, great people like Jack Bogle.

Mac Greer: Well, David, it's been great. I started at the Fool in August of 1998, and I will confess that I did not know who Jack Bogle was when I started here.

Gardner: August, 1998. Wow. Mac, I didn't realize it's been 18 years.

Greer: It's been a while.

Gardner: So you and I had some good face time with Bogle over the years. But in particular, I was remembering one time that we were in your native city of...

Greer: Houston, Texas.

Gardner: ...and there was a book signing that we did together with Jack, right?

Greer: Yeah, there was a book signing. You and Tom and Jack Bogle had been keynote speakers at the Houston Chronical Financial Conference. The newspaper...

Gardner: Yeah. We met Ken Lay at that conference.

Greer: That's right. That's right. And I think we asked him to be our next CEO, and he declined, which ended up being a good thing.

Gardner: Enron's Ken Lay. Yeah.

Greer: Yikes. Anyway, we were driving... And I should define our terms. We were driving in the Foolmobile, which for those of you not familiar with the Foolmobile was an SUV with an inflatable Fool cap, which was kind of like a moon bounce, but it was like a Fool cap.

Gardner: Now the Foolmobile still exists today, but the cap is gone...

Greer: The cap is gone...

Gardner: ...probably for reasons that are understandable to us.

Greer: Right, right. Looking back it may have been questionable.

Gardner: It doesn't work so well with SUVs...

Greer: And terrible mileage. But anyway, so we're driving from one event to the other. I remember Jack Bogle basically hitching a ride with us. I think we were going to a book signing, and Jack was doing the book signing, as well. So he said, "Hey, can I come along in the Foolmobile?"

So sure enough, here we are in downtown Houston driving with Jack Bogle. I'm in the backseat. You and Tom in the front seat, I think?

Gardner: No, I think I was toward the back, as well, because I can still picture it all. So I was definitely toward the back of the Foolmobile, as well.

Greer: OK. And I remember I'm yapping his ear off. I do remember that, because I was very excited. But we were going through a very seedy, dodgy part of town, and I can say that because I'm from Houston. And by dodgy I mean tattoo parlors, video stores. And I'm not talking like the family friendly video store.

Gardner: Right. Not Blockbuster ...

Greer: No, not Blockbuster.

Gardner: ...of yore.

Greer: Very, very dodgy. Very dicey. And Jack Bogle turns to us and do you remember what he said?

Gardner: I can't exactly, verbatim, remember, and I know you have the best memory at Fool HQ, Mac, so I know you remember what Jack Bogle said.

Greer: He said something in his beautiful baritone voice. Something along the lines of, "We're not going to be telling Mrs. Bogle about this." So he just had this amazing sense of humor and, as you mentioned earlier David, just all types of integrity. Just as true as the day is long, and so I just share your love letter to him. He's one of those guys that when you finally meet him, and you've read so much about him and you've heard so much about him, he is who you want him to be.

Gardner: I understand my brother Tom may well be interviewing him this week as we tape. I'm hoping -- we're going to see -- but I'm hoping we can get Jack maybe cameo next week's podcast. We'll see.

Greer: That sounds great.

Gardner: Thank you, Mac Greer, and thank you, rule breakers, for your attention this week during this month of gratitude on Rule Breaker Investing. In fact, before we wrap up I want to highlight a Foolish holiday tradition that's near and dear to my heart. I think Jack would appreciate this, as well, so this maybe fits the love letter, too.

You know, each year The Motley Fool hosts a campaign to give back and invest within our communities, and this year we partnered with Growing Power to bring sustainable food and employment training to at-risk communities within the United States. You know, roughly one in seven Americans don't have access to healthy, safe, and affordable food. Growing Power is on a mission to combat this food insecurity, and we want to help them succeed. Our goal is to raise $60,000 and we hope you'll help. To learn more about Growing Power and to make a donation, visit Give.Fool.com. Again, that's Give.Fool.com.

All right, that sends, for now anyway, our love letter to Jack Bogle. Jack, thank you. Thank you, rule breakers. Thank you, Robert Brokamp, Mac Greer, and Rick Engdahl who tirelessly works to reedit all of my flubs every week that you never actually hear on this show.

Anyway, I hope everyone's having a wonderful holiday season. Talk to you next week. Fool on!

As always, people on this program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at RBI.Fool.com.