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Investing Legend Jack Bogle Answers Your Questions

Last month, we asked our investing community for some questions that Motley Fool CEO Tom Gardner might ask Jack Bogle, founder of The Vanguard Group and champion of the index fund. In this video, Bogle answers those questions in addition to offering his thoughts on a wide variety of investing topics.

The entire conversation between Tom Gardner and Bogle is available here in its entirety. The two discussed Bogle's challenging start in the world of investing, the best way to invest with index funds, the ethics surrounding financial advisors, and more. A full transcript follows the video.


Thirty-nine years ago almost to the day — a little bit longer than thirty-nine years ago — you started The Vanguard Group. Jack Bogle, one of our heroes at The Motley Fool for so many different reasons which will come out, hopefully, in our conversation. It starts with simplicity, clarity, integrity and a solution that is transparent in a financial industry that works so hard against those qualities, it seems, many times.

What was life like for you in 1974? Can you paint a little bit of the picture of what Vanguard was then compared to what it is today?


Sure, and this will not be very surprising to anybody that's ever started what we call in the modern age — didn't use the term then — a "disruptive" technology. We were shrinking. When we finally broke up the Wellington Management Company into certain operating units and Vanguard took over the administration, we were going downhill. One of the directors said, "Bogle, do you realize we're hemorrhaging?"

Realize it? We had more money going out than coming in for 83 months. You've got to be kind of blind, you've got to be kind of stupid and you've got to think it's great news when a month's cash flow goes from $20 million out to $19 million out. Everybody condemned the index fund. Ned Johnson said, "Our shareholders would nev-uh want a fund with average performance..."


Me-uhr average...


And that was the year (in 1976 probably) when all the Fidelity funds had fallen out of bed. They weren't getting anything like average performance — just for the record. For whatever that philosophical bent was on his part (nice enough to say) they now have a $150 billion index fund.

So, we've seen this huge swing. Help stamp out index funds. Bam! Bam! Bam! That big Wall Street poster. Everything was negative. The Wellington Fund had been just about destroyed by our partners in Boston from an investment standpoint. That was the flagship of the Vanguard fleet, and it dropped from $2.1 billion to $400 million. The performance was the worst in the industry for any balanced fund.

There wasn't a lot of good news around. All the funds that were part of the merger went out of business — the Ivest Fund. Funds that people had never heard of — the dustbin of history. One called Technovest using technical market analysis. Yes, Wellington bought out such a fund. And a fund for trustees called Trustees' Equity Fund — the first one. It crumpled like tissue paper in a fire, to take a metaphor.

So, everything was bad. You had to know you were right in the long run. You had to know that gross return in the financial markets minus cost equals net return. Pretty smart here — that's the underlying principle.

And I didn't really phrase it this way in those days, Tom, but when you think about it, we're all indexers. Every investor in America is an indexer because 25% to 30% — let's call it 25% — is indexed. The other 75% own the index, but one at a time. That's the total market and if you have the total stock market fund, you either own it as a unity or you own little chunks of it and somebody else owns the rest.

So, when the unity (let's call it the unity business of the index fund) does better than the trading business (for all these other people that own the index, trading with one another and trying to outpace them, which of course can't be true) and they pay their little helpers — therefore they have to lose. It's all so clear that it is a disruptive technology and it works. But anytime you try to introduce a new idea, it's first, "It will never work." Then, "It will work, but only for a short time." Then, "The guy's really lucky." And finally, "He's right."


Do you think you're in the "guy's really lucky" phase or is there a phase in there where it is "the guy's a threat and we're going to say whatever we can to confuse people about the solution that he's putting in the market."


Well, they can try that, but it's too late for that. It's too late. And in the last five years, roughly $400 billion has gone out of actively managed funds and $600 billion has gone into index funds. It's a trillion dollar swing. Just for the equity part of the business, it's probably around $6 trillion or $7 trillion. It's a huge swing in five little years — so the market is responding. Even the people that don't like it at all are doing it, because the client insists on it. Part of the insistence is going in the wrong direction — and that is we have the ETF — which is a way of trading the index fund all day long in real time. What kind of a nut would do that?


Well, there are a lot of nuts out there. Even though there's been a tremendous growth in index fund assets, simultaneously there's been a complete diminishment of long-term investment as a principle that is both adhered to by individuals and by professionals. It's covered in the financial media that way. The average holding period for a stock or a fund or holdings within an actively managed fund's turnover ratio is north of 100%.


It's actually much higher than that when you look at the cost, because that's the lesser of the portfolio's sales and purchases that you count as the amount of turnover and then divide them into the assets of the fund. The fact is whether it's more, less or even the same, you've got those two sets of transactions. You take money out of a stock — that costs money. And you put money back into another stock and that costs money. So, the costs are very high. The unit cost, in fairness (costs from trading a share) used to be $0.30 or $0.25 in the old days. Now they're probably less than a penny. But if you're trading 500 times as much...


Is there anything good about trading in your opinion?


Well, yes. I think the market needs a certain amount of liquidity and I accept that — but how much liquidity do we need? Do we really need the market to turn over 250% a year? I grew up in this business. There wasn't a liquidity problem and the turnover was 25% a year. I've been known to say — you'll like this expression copying Samuel Johnson and what he said about patriotism — "Liquidity is the last refuge of the scoundrel."


And the scoundrel is transacting that frequently. What's motivating them? Is it human nature and they're blind to what they're doing? Or there's a built-in conflict of interest that's causing a professional to transact either in their retail clients' accounts or for reasons inside their fund?


Well, first there's a lot of ego out there. Even someone you know has a pretty good ego, but he doesn't use it by saying, "I'm smarter than other investors." But we all think we're smarter than the other guy. We all think we're better drivers. Sometimes I think we all think we're better lovers. I don't know about that. But we're all average — we know that — and have to be and will be. No Lake Wobegon here in the investment business.

And then we have this massive marketing machine of paid salesmen who can always beat the index. Because if you've got a universe of 500 funds and someone says that they want the index because it does better, then "your problem is you're looking at the average fund. I will give you a fund that's above average." It's always easy to do. For some period, for some fund, it's the easiest thing in the world to do. It's a sales machine, and they have conviction they're doing the right thing, but they've got to know, deep down, they're not doing the right thing.


Now there have to be some you believe are doing the right thing on the active management side. There have to be some investors you've encountered over time that you think it's admirable what they're doing and that the results — insofar as we can draw a conclusion off a single sample of one person's lifetime — appear to be above average sustainably.


Well, I'm not sure above average is quite the standard. That's a really tough standard to meet — but you can do a perfectly good job. The managers I like — and I don't hesitate to say who they are — you can look at Dodge & Cox and you can look at Longleaf and there are probably a number of other small firms.

What's so good about them? They are in the business of investing management and not in the business of marketing. This has become a great, big marketing business. They stick to their guns and they manage money. They slip. They stumble. They err. They make mistakes. This is a business, for all that. But in the long run, I would bet on someone whose business is trying to be a professional investor — not a trader — someone whose business is trying to serve you rather than serve the marketplace.

There aren't a lot of them — and I don't want to put a curse on them — because they'll get too big and they won't be able to do it anymore. That's one of the great secrets of this business — and that is if you're really good for a long-enough time, you'd draw out an awful amount of money and then you can't be good anymore.


Too big to succeed...


Too big to succeed, or as Warren Buffett says, "a fat wallet is the enemy of superior returns." And of course it is. If you can get someone who can give an index a good run for its money, I wouldn't say you're going to do a lot better. I don't think they would say you're going to do a lot better. But it's a good alternative, because you don't know all. There's an infinite number of choices. I think Longleaf probably runs four or five funds. Dodge & Cox runs five, I think. Fidelity runs 260 funds. Vanguard runs, I think, around 170. I'm not sure anybody really knows, and that's on a whole lot of levels.


Can you describe fundamentally how an index fund works for somebody who is watching and owns a Vanguard index fund? How does the process work behind the scenes? Is it five robots, three monkeys and a bunch of data, or are there human choices that are going into the index?


Well first, you can match the index in a very casual way. If Microsoft is 2% of the index, you just put 2% of the portfolio in Microsoft. And then the same thing is true with every other fund. Not very complicated. And if you don't do it with great professional skill and all kinds of quantitative support, you will do a perfectly good job, but not a perfect tracking job. In the long run, you'll match the index, but you might beat the index by 50 basis points, half of 1% in the year and lose to it by 0.5%. The tolerance is very small.

Our investors like to see a tight tracking, so you do all these quantitative things. They call for quantitative mathematical skills, particularly when there are additions to the index or subtractions. That happens more in the Standard & Poor's 500 than in the total stock market. It's a very simple thing conceptually — but to do it with something that approaches perfection is just what you say — a lot of quantitative people hidden behind the wall.


If we take the concept of "too big to succeed" and apply it to a capitalization-weighted index fund, isn't that a bad idea? Wouldn't it be better to set the index fund up on a different set of criteria rather than weighting it by capitalization? Aren't we buying the largest companies and the most successful companies which have the smallest future market opportunity and underweighting the small, potentially upstart, disruptive future Vanguards?


Well, you're saying that the cap-weighting indexes give you a flawed index, in effect. I guess my first comment would be since such an index beats the heck out of money managers, what kind of trouble would we be in if there was a perfect index? More importantly than that, the idea of indexing (as Paul Samuelson described it when he wrote the foreword to my first book) was you will get better returns than your neighbors and sleep better than your neighbors. And your neighbors own the capitalization-weighted index.

Now, will a value-weighted index do better or a dividend-weighted index do better? Probably it will do better some of the time. I do not believe it will do better in the long run. That remains to be seen. But when you think about it, if fundamental indexing (whatever that means exactly — but a weighting by some company's corporation data rather than by market price) still owns essentially all the stocks that the S&P 500 owns (which is somewhat different weights) they may do better or they may do worse, but if they continue to do better, what will happen? Everybody will take their money out of the market-weighted index and put it into the value-weighted index and then the opportunity will vanish. That's the way the markets work.

I don't think it's going to work and I don't think that it's worthwhile to add that risk. I know what I can get. I can do better than my neighbors. I can own the whole market — that's a little beyond the S&P but that's a perfectly good way of looking at it. Should I give that — let's call it the certainty of relative return — up for the uncertainty of whether one of these schemes that's out there (equal weighting, value weighting, dividend weighting, fundamental weighting, all kinds of weighting)...


I feel like equal weighting would be smart, but I guess time will tell whether that plays out.


[00:14:58]. We have data going back forever — but don't let past data impress you. When people start actually doing these things — you know this from your own experience — what comes out of the lab is seldom reflected in the real world.


Let's say somebody is indexing entirely. How many funds should they own as an individual? What's too many and what's too few?


You can certainly deal with one, and that would be something like the Vanguard Balanced Index Fund. It's 60% total stock market, 40% total bond market, both U.S. That's fine.


A person out there could simplify their lives — make sure they're paying off all their high-interest debt. It's gone. They're saving a portion of their salary each year and they're putting it all in the Vanguard Balanced Index Fund. And that three-step approach is going to improve the outcomes for the majority of investors out there, number one, and you think it's completely reasonable to put it all in a single fund.


There are obviously a lot of nuances here and one of them is if you're younger, I would think you would want to be 80% or 85% equities and if you're older I would think — although interest rates are so terrible today you have to rethink all these things as the market has changed — but older maybe 25% equities and 75% bonds. Something like that.

This is rather age-based. Your bond position should equal your age — but that's a rule of thumb and interestingly enough, it shows a gap in the way these target-based funds that are very popular today are structured, because they ignore the fact that 85% of their shareholders have social security.

And social security, when you begin it, has a stream of future payments you will get that are capitalized at around $350,000. If you have $350,000 totally invested in an equity index fund, you're 50/50. And you don't look at it that way, and your behavior may get you in trouble that way because you've probably got too much in stock.

What people should be doing — honestly, Tom — is stop looking at the silly stock market every day and look at the cash flow they get. Social security — those payments are going to continue. They're going to grow with the cost of living. I'm certain — as certain as I can be — social security will be repaired simply because it has to be. I don't think its future is in doubt. We just need to wake up a few of those people down in the nation's capital.

For stocks, you probably want to look at more of a dividend bias. You could buy a high-yield dividend index instead of the total stock market index that's capital [00:17:49]. That dividend — if you look at the stream of dividends — it makes the stock market look violently volatile. The dividend stream goes up, up, up.

The fact of the matter is there have only been two significant dividend cuts since 1925. One was in 1929-1932 and the other was a few years ago (2007-2009) when all the financial companies eliminated their dividends. We've already recovered from that. That's over. We're up in the S&P. The Standard & Poor's index is paying more dividend now than it was before the drop.

All of these things are clear in the past and, in a lot of ways, that doesn't matter. But if you assume that American business grows and America grows, the dividend stream will keep going up. And as people ask all the time, corporations have got huge amounts of cash so dividends should not be jeopardized absent some real problem in the world and in the economy. People should be aware of that. Nothing is a lead-pipe cinch in this world.

Actually, it's sort of amusing. You have a couple of big risks out there. You know about the economy. You know about the international — kind of hanging on by its own. You know about the dollar. You know about the Federal Reserve buying all those securities and trying to bid the prices up of assets — not a particularly wise move. You have to assess those risks and try to make some kind of a judgment, however difficult, about how they come out.

But you also have to realize a couple of things. The second set of risks is really the incomprehensible risks like nuclear warfare or a meteorite hits the U.S.


Or robots begin to control our society.


It won't matter whether you have stocks or bonds or anything else.


You'll need a club.


Just a club. There are all kinds of big and small risks. As I've often said, we're sitting here knowing the world is going to hell in a hand basket, but people have been worried about that since the beginning.


The known fears are not the ones to really fear. And by the way, Jack, I truly can't believe that you're 84 years old. Are you 84% in bonds?




So, you're violating your advice. I'm kidding...


It's my rule of thumb. And of course, at 84 your social security doesn't have a capitalized value of $350,000 either. I'd like the next check to come in. My wife doesn't think we should take the checks, but we postponed them until we were 70. I could live on what I get from social security because we live in a fairly modest way — very modest compared by the standards of what you see in the financial world and corporate world. But pretty nice compared to the typical American worker. You start with a rule of thumb...


And then you work back...


...and you work back. And I haven't figured out, Tom, how to do it. When I first introduced this rule ... I can remember back in 1999 at Morningstar, I told them that I was reducing my equity position from about 75% of my holdings to I think it was 30% of my holdings, because the stock market was selling at 35x earnings and the bond market was yielding 7%. I looked at the transcript a while back and I said, "Honestly, when I look at the math, I don't see why I would hold any stocks at all, because at 30x, 35x earnings, stocks were not going to give you a 7% return in the first decade of the [21st] century..."


And now you look at the numbers, and you're not really sure what to do about them.


And now my own position is that stocks are more or less fairly valued — probably a little on the high side — but more like, depending on whose number you're using, 15x to 17x earnings. Maybe 18x earnings. It's a long way from 35x — half. And bonds are not yielding 7%. They're yielding — depending on what you want to look at — 2.5% to 3.5% depending on corporate government mix, maturities and things of that nature. You have to think a little bit differently, but I have not done anything about that and I don't change my portfolio.


I want to talk a little about financial advice and how that side of the business works, because Vanguard is at least perceived to be exclusively a mutual fund company, so a lot of individuals are trying to figure out how to put a portfolio together. It's helpful to hear the number of funds that you would put into an account for an individual. It's relatively small, and it should be manageable and a decision an individual can make on their own.

Yet many people come to their financial advisors and say, "Please, Jack. Just do it for me. I'll literally give you the authority to make all transactions in my account. I don't want to know anything about it." This, of course, sets up a lot of people to be taken advantage of by financial advisors. What do you think of the financial advice side of the decision-making process?


I got a letter from a shareholder the other day saying, "You keep telling me you only need three or four funds. Why do you have 170?" I took this simple example for him. We have like 60 bond funds. Why is that? Well, we invented, created or developed a system of you telling us the maturity, how much risk and income you want. You've got short, medium and long and also a couple of variations around that.

Then in the municipal area, you only have the funds themselves, but they're dealing with different states. Then we have some bond index funds. We probably have 60 bond funds out there. An investor either has to know and do the math — should he be in municipal bonds or in taxable bonds — it's a very important decision. Right now, municipal bonds look very attractive simply on those kinds of numbers.

Then you have to decide how you want to balance risk and return. Obviously your higher yields, no matter how depressed they are, are in long bonds; but the greatest risk is there. And the lowest yield is in short, but the greatest principal stability is there. Those are decisions investors really have to think a little bit about. You can buy the bond index to be sure — and that turns out to be an intermediate-term bond fund — and that's perfectly satisfactory.

We nuanced ourselves to death a little bit. You should, in terms of taxable and tax-exempt, deal with that issue. I'd say to simplify. Most investors should be in tax-exempt just because they yield significantly more than Treasuries, even before you take account of the tax exemption. I think they're attractive. Maybe you want some Treasuries there as your bulwark and you buy a Treasury Bond Fund. It gets to be a little nuanced.

I think the interesting question is if you want financial advice — how much should you pay for it? Let me give you an interesting piece of math. I look at the stock market investment return as a 2% dividend yield at the present time — low but not nearly as low as the 1% we warrant — and a 5% earnings growth. That's a 7% investment return and over the next 10 years, I don't think it's going to go up because of higher P/Es or down because of lower P/Es (not down much, anyway) so there won't be any speculative return by my reckoning.

So, we've got 7%. That's nominal. So, we go to real. And if we're lucky enough to get 2% inflation, that's 5%. And a typical fund manager is taking 2%. That's 3%. And if you give 1% to an investment advisor that's a third of 3% and you're down to 2%...




And if you're a fund picker, you lose around 2% by jumping on the latest bandwagon and 2% minus 2% is a number that I won't recalculate for your audience.


It's a reminder of Warren Buffett saying that the financial services industry is an extractive.


Sure. The economists call it a rent-seeking industry. Of course it is. It has to be. It has to shrink, and it has to get its costs down. The trading volume has to come down and a lot of mutual funds — they're going to be cash cows. The big mutual fund companies are fantabulously profitable. They can't change what they're doing and do what we do because they would not be profitable for their owners.

These are financial conglomerates or all those partners at the Capital Group or the Johnson family up at Fidelity. Their wealth is like $20 billion or something putting the family all together. They've done great in this business. Whether their shareholders have done great is the question that interests me. That's where we should be focused.

And the financial conglomerates are the same thing. They basically tried to destroy this industry. Forty of the fifty largest fund groups are publicly held and thirty of them by financial conglomerates. Think about buying a fund that's run by a financial conglomerate. Why did they buy their way into this industry...?


And why are there more of these...


The Golconda. They wanted to jump on the wealth bandwagon of managing money, and they will accomplish that whether by hook or by crook. If their return capital threshold is at 15% and they'd pay a billion dollars for a mutual fund company, they're going to have to take out $150 million a year. And that's easy. There's all kinds of things you can do...


You're a fan of capitalism. So, if we look in the marketplace in finance and compare it to actors out on the stage, one of them is a fee-only fiduciary financial planner with a basic flat fee dollar amount that sits down and builds a Vanguard-based, indexed, low-cost portfolio acting as a fiduciary. The other is a financial advisor or broker.

I'm reminded of three that came to a book signing of ours in San Diego years ago and said, "You talk about the Vanguard Index Fund. It's really funny you say that. We now manage money. We've left the firm that we were at..." (in their case they were at Merrill) and they said, "We couldn't sell the index fund to our clients because we couldn't make any money on it, but we all owned it ourselves." It's the complete reversal of the fiduciary. It's like, "I will be fiduciary for myself, and then fiduciary with my relationship with you is if you're willing to buy what I'm selling. Then I haven't done anything I should feel badly about."

The reality in the marketplace is that the first actor — the fee-only financial fiduciary — is living a relatively lean existence in terms of the financial makeup and the VP of the big investment firm has a country house, is making $1 million a year selling load funds and a whole bunch of booby traps in the portfolio to keep you locked into different products. How do you observe and what conclusions do you draw about capitalism given that?


Capitalism is a very funny manifestation when you get to the fiduciary duty of managing other people's money. With most systems — particularly when you begin with a new idea — if you want to get it sold, you pay the salesman a lot of money, you advertise a lot and you deliver seventy cents on the dollar, or something like that. The investment business is really a business of mathematical candor. You can't hide.

If you're selling a Mercedes-Benz, the salesman is going to say, "Look at the value you're going to get. Your neighbors are going to be envious. Blah, blah, blah." And you like the diesel fuel or the door slams nicely or it's got a great sound system or air conditioning — I don't know what. But in the financial business, value is one thing — dollars. It can be measured unlike all these esoteric things that characterize capital. And once you get the measure and the value, the problem becomes a very simple mathematical problem.

Now how you get people to focus on that is a good question. How do you get them to focus on the role of cost in that is a good question. How do you get them to think about the long term? It isn't two or three or four years — the difference in cost. Let's face it. It just doesn't matter.

But over your investment lifetime, getting the market return and an index fund (or almost the full market return) compared to paying 2% (which is roughly the right number for a managed fund) means that you get, in the latter case, about $0.30 on the dollar. Thirty cents. But you've got to look at 40 or 50 years. To these young people today (say they're 25 years old) 50 years is like 75 years. That's too short. They'll live to 95. They should be looking at 70 years and these numbers just get further and further apart.

A lot of people need help — there's no question about that — but I think we have to rethink how we pay for that help. It may be that 1% is much too high. Or at 1% — if you have a client with $25,000 — 1% probably isn't nearly enough. I think eventually you'll have a fee-for-service kind of thing like a typical professional service — lawyers, accountants and so on — neither profession of which I'm particularly smitten with. They're born that way and that's the way they conduct their business. It's more of a professional approach than a business approach.

But don't try and get me to tell you there are easy answers to this. You need help out there. People need their hands held. There's no question about that and paying a little bit for it is probably better than doing nothing and just trying to do it yourself. And the worst thing of all is not investing at all. That is the one guarantee we have in the financial business. Well, there are actually are two. One is if you buy the index fund, you'll get the market return. Guarantee two is if you don't invest, you will get nothing.


Let's take the family I was raised in, which taught us, at a relatively early age, to buy stocks directly. I'll make the argument on behalf of it. One of our members, Neal, wants to know what you think of that argument — where you see strengths and weaknesses to it. And feel free to knock it down entirely. You'll just be knocking my whole life to the ground if you do.


Oh, will I really be doing that?


No. We were raised in a family and taught to invest in stocks. It was a low-cost alternative, a one-time payment. I guess one of the primary pieces of advice I give to any investor who's buying stocks is double your holding period right now. And if you want to do it right after you've done that, it's great. Double it again, because just as with a great fund, a great business should be held over at least five years to really see the value of that organization play out in the marketplace.

We were taught to buy stocks — the low-cost, one-time transaction. Find the great businesses with a great leader as Howard Schultz has been in Starbucks. John Mackey of Whole Foods. These businesses have compounded incredible returns since they became public 20 years ago. And hitch your wagon to the stars of these really great, often consumer-facing businesses that we can follow. Have to do a lot of numerical work and valuation, etc., but that's how we've been building our portfolios in our family.

Neal wants to know when it is appropriate, in your opinion, for an individual to buy stocks. Is there a level of expertise or interest? An amount of time you should have or capital? Or should it be a side frivolity in a base portfolio of index funds?


That last sentence captured it best and that is you should have a serious money account — I might even call it a boring money account — where you put money in a stock market index fund and balance that a little bit with some bonds, depending on age and so on — and don't look at it. Don't look at it for 50 years. Don't peek. But when you retire, open the envelope. Be sure a doctor is nearby to revive you. You'll go into a dead faint. You can't believe there's that much money in the world. That's where we fool ourselves. That's a serious money, boring money account.

We have a gambling culture here in this country. Maybe every country does. You see it in its finest manifestation — or maybe I should say worst manifestation — in the state lotteries. Las Vegas contributes its share. The races contribute their share. The tracks. All of these are just gambling where a lot of people bet their money and a whole lot of people take their money out and the croupier wins...


Three to twenty percent of whatever is there...


...of whatever it is...


You put a dollar in...


...I'd say if you have a gambling instinct (and most people do) at least start off in an index fund period and for five years don't do anything else. And then look around. See what's happened in the five years. See how it felt when the market dropped 50%. See how it felt when it came back. And those five-year periods are going to be very different from one investor to another because they're all over time. Then when you get there, 5% in the funny-money account...


What would have happened to Warren Buffett if he had done that? A tremendous amount of value would not have been created by his understanding and ability to evaluate a business for investment.


Well, name two.


Well, Longleaf. You mentioned Longleaf.


Well, but they don't have the sensational returns. They probably have something above par returns, but maybe a little below par from time to time. And then don't forget in Warren's case, he wasn't running a mutual fund. The mutual fund is a badly structured business for investment management. We say — and this is the way it has to be, really — you can take your money out whenever you want and you've got to be ready to put it in whenever you want, and so you ride on these waves of optimism and good performance.

The money comes in up here and then reversion of the mean — which is a big part of the final chapter of my recent book — or clash of the cultures. And it's happened everywhere. It's happened in the Magellan fund. It's happened in the T. Rowe Price Growth fund. It's happened in our old Ivest fund. It's happened in Fidelity Trend fund that Ned Johnson happened to have run. It happened in the CGM. All the hot funds — they were all in there for the last 25 years and they all look like this. You put them over each other. It looks like the Himalaya Mountains. The reversion of the mean is a constant pattern.


For the individual — I'm just going to poke around here a little bit just to get your full philosophy — it's unlikely you're going to hit the mountaintop of the Himalayas with your portfolio. You may not have to ever see the other side of the mountaintop unless you have so successfully invested that your personal account is moving up in the billion dollar...


Let's say you bought Magellan before it was for sale — which is where that record begins, by the way. There's a lot of phoniness in this business. You're going to enjoy the mountain, and you're not going to know it's a mountain. But when that mountain gets up there, you think, "My, God. I found the Holy Grail..."


Now I'm really going to go all in...


...and now I'm going to go all out. So, there's a lot of behavioral kind of stuff — not to use too fancy a word — in the mutual fund industry. Interestingly enough, Tom, there is no behavioralism in the field of stocks generally. How could that be? That's because I'm a dumb behaver. The guy that buys my stock from me is a smart behaver. We offset each other. It's not as if I can make a behavioral mistake without somebody else making a successful behavioral move on the other side of the trade. I think we take a lot for granted. We listen to all these theories and big, old, boring indexing is the answer.


Have you ever bought individual stocks and/or actively traded funds — and if so, what do you look for in those investments?


Well, when I came into the business, I had friends in the brokerage business. I bought this, that and the other thing. And then I had a broker. He would tell me this was good, get out of that and get into that. It wasn't that they did badly — which was, of course what they did — but it was just I couldn't stand to have my phone ring when I was trying to do my work. So, I haven't owned individual stocks since, let me say, 1960. I don't know exactly. A long, long time. I've never bought anybody else's mutual fund, although I did buy a nice back-up investment for my son John — the Bogle Small Cap Growth — and it's done rather nicely. Of course, he's very smart. That's about it.


Even the most successful, actively traded funds at Vanguard have a period of three years — sometimes even five years — where they underperform, but net-net they've outperformed in the case of outperforming actively managed funds. Let's just say they have a few qualities that we probably both love: very low turnover, tenured leadership, a fundamental business-focused analytic approach. But even in those cases where the fund is very well run ... even Warren Buffett and Charlie Munger are going to have a year or a period of a couple of years, potentially, where they lose to the market. What's the appropriate amount of time to hold something before saying, "This team doesn't really know what they're doing?"


Well, let me start off by explaining Vanguard's philosophy as I implemented it — not as they necessarily do today. That is very early after we closed Windsor Fund back in 1985 —- it was getting too big — and we started Windsor II. Everybody said it would never do nearly as well as Windsor. Of course, it's done better a little. They track each other very closely, so I don't want to make an issue about that.

Then we had U.S. Growth, and that was run by Wellington. We decided we needed a new manager. I wasn't so sure about them, so I did what set the standards for everything I did since then, and that is bring in another manager and then another manager and then another. We have a lot of equity firms that have five managers. It's not that it's easy to pick five managers, but if you're comparing yourself with the universe of large-cap value funds and there are fifty funds in that universe, five is going to have the same return. It's a law of large numbers thing.

Most of our equity funds have five to seven managers, so there's not much premium on manager selection. You hope they will do well. We happen to be having a good year this year, but we'll have a bad one because that's the nature of the business. What you don't want is something that departs so far from the market, particularly on the upside (and you don't like it on the downside) but on the upside, it draws money in. It brings in these investors who are looking for the next big thing, the next hot thing.

And we win by about a point and a half a year on average — not because we pick better managers, but because we have very low operating costs in our expense ratio. We negotiate the fees way down with the advisors, because the advisors are not starving to death in terms of the dollar fees. And then we've looked, as you said, for long-term managers with lower turnover. And then we have no loads. If you look at all those numbers — if we're good enough to be average, or lucky enough to be average, we win by about a point and a half a year which is 20% over 10 years, and I always thought that was quite good enough.


Just a few more questions. Is there ever a situation that you can imagine where an individual should own a load fund? They've sat down with a financial advisor. They watch this video, and they're looking though their portfolio as we're talking, and they see a number of funds that their advisor has put them in that carry a load. Is there ever a situation they should be happy about that?


I'd say unequivocally not. The advisor is going to sell you a load fun and say "this no-load stuff is bunk. Here's the no-load index, and this fund, even counting the 5% commission..." (which is roughly where they are today or where a lot of that has changed to advisory fees), "even with that 5% commission, we did 50% better."

Well, hindsight is always 20/20. If they can't find a fund that beat the index, they can't be very acute. They can't be paying much attention. It's the easiest thing in the world to do. Just don't believe it. The past is not prologue, and actually if you look at the numbers carefully enough and long enough and thoughtfully enough, you'll see the past performance of the fund is anti-prologue. The better it is in the past — the more the regression to the mean is, the greater that's going to be in the future.


Do you believe that we will have a unified fiduciary standard or not? Are you optimistic about that?


Let me just say this. The issue is a very narrow issue at the moment and that is the fiduciary standard for people who are selling funds (investment advisors, fee-only investment advisors, stockbrokers — it's the firing line level). I think we are making a very big mistake (I've written to the SEC three times about this) and that is the biggest problem on the fiduciary side is in the fund manager side. We need a federal standard of fiduciary duty for fund managers.

Look at what's going on at the Labor Department, and I've talked to them down there about this. If you look at the fiduciary duty for a corporation and for an evaluator and for this one and that one — no fiduciary duty for the guy where you really need the fiduciary duty — the fund manager.

So, we do need fiduciary duty. That would tend to get us out of this morass we're in of short-term trading, of high cost, of speculation versus long-term investment (because it's the antithesis of trading) and would probably eliminate the conflict of interest that's obvious if your fiduciary has two sets of fiduciary duties.

One is fiduciary duty of the mutual funds and the other is fiduciary duty to the shareholders of this publicly held company or publicly held conglomerate. Those two fiduciary duties are in direct conflict — and so we, of course, quote the Bible — "No man can serve two masters," and then we add to that what Matthew quoted the Lord as saying right after which is, "For he will hate the one and love the other."

Now in this business, who pays the portfolio managers? Who makes all the money? Who has all the public stock? The manager gets all the love. And I won't say they hate the shareholders — I wouldn't say that at all — but they love the managers more.


I want to just talk in the end a little bit about the fact that you've been a business leader. We talk about investments — but you started a company and ran that business and it has $2 trillion in assets today and 14,000 employees. It's massive, and I'm sure it's way beyond what you would have dreamed of in 1974 (although I'm sure you were optimistic about your chances given the solution you created). How do you evaluate talent — the people you work with? What were some of the cultural features of Vanguard during your leadership?


One of them is exemplified by a story I tell about the time we got to around 200 employees and I thought, "We really ought to have a personnel department." Human resources it's called now. It seemed like a good idea. I was really a dictator, so I looked around and tried to see who was not busy in the office. We were very strapped for being able to spend any money. There was a secretary in the legal department — a very lovely woman. I talked to our lawyer. We had one lawyer then — we have 140 now — that's called progress.

I said, "Could I use her to run a little personnel department?" And he said, "Yeah, I think she can do that." So, she comes into my office and I said, "I'd like you to do this." She replied, "Whatever you want, Mr. Bogle." We talked a little bit and she started to go out of the office. She was about to walk out the door and she turned around, came back in and she said, "I want to do whatever you want me to do, Mr. Bogle, but I don't know what it is you want me to do."

I said, "Well, I'm not sure I know either." This is what happens when you're a very small company and I had a lot of things on my mind, of course. I said, "I don't know what it is that I want you to do, but let's start with this. Hire nice people and then make sure that they hire nice people. And that's the best I can do on this." Most of the jobs at Vanguard — some of the technology jobs require a whole lot of professional skill. Most jobs can be done by intelligent human beings with little experience and the motivation to do them.

So, I look at Vanguard as not being some, "Can we hire the best and the brightest?" It's a big universe and we probably have our share of them. But you try and get people that you can work with that can work well with others. They're going to try and not make the same mistakes you did. The change from a tiny embryonic organization where there is a captain and the rest are the oarsmen down below in the galley ... that's obviously oversimplified.

But our mission is very simple. Our presentation is very simple. When you think of what we can explain to people about what they should do in investing, it's right out of the proverbial hornbook. It's the ABCs of the old days. And it works, it's understandable and it's guaranteed to give you your fair share of whatever returns the stock and bond markets are generous enough to give us or mean enough to take away from us.


There's a Gallup survey that shows that seven out of ten people going to work in America today basically say they're indifferent or even downright negative about the organization they're working for. In a funny way, in that rowboat scenario, where we're all rowing together ... in many organizations, more than half of the people don't even really care about what they're doing. Obviously you've found people who are passionate about the principles...


We have more turnover than I would like, but that happens at these middle-grade job levels. Our people are well paid. They've got terrific benefits with partnership plans. They share in the earnings we generate for shareholders.

I still spend an hour with each Award for Excellence winner — the program I put in there all those years ago — and there are probably about eight per quarter. It may not sound like much in an organization that big — 32 a year and 320 in ten years and 640 in twenty years.

Now these are exceptional people and that's why they got the Award for Excellence, so I'm not kidding myself. But we have human conversations. Talk about commitment. Talk about opportunity. Talk about the lack of opportunity. Talk about anything they want to talk about. And they're among the most engaging and pleasant moments of my career.


You're in the unique position of having started the company, run the company, and now sit as an observer of your creation. Succession is such a big issue for so many. We have a lot of small business owners that are at The Motley Fool and thinking about that. What have you learned and what do you think about? I find it to be a great thing that you have "minor lover's quarrels" with things that are happening at the company that you created — which I think must be intellectually stimulating for you and the organization. How is that experience for you?


It's difficult — let me be honest about it — it's difficult. The company is not particularly smitten with my directness, outspokenness and my books. People don't like criticism, generally speaking. I'm just trying to tell it the way I see it. I'd say my book, The Clash of the Cultures, almost entirely reads like a great big commercial for Vanguard, but there's some things they don't like in there — talking about the Wellington Fund fee increase which I believe was unjustified. Talking about our proxy voting policies. Talking about the possibility of having a transaction tax and a bunch of other things that are similar to that.

I finally had to develop a response. When someone says that they understand I disagree with Vanguard, I'll say, "Absolutely not. I would never disagree with Vanguard. Vanguard disagrees with me and it's their right."


You're optimistic about what Vanguard will become over the next hundred years.


Where we are, you have to be optimistic. There are risks out there. They were trying to "de-mutualize" the company. That has happened in a lot of places. I don't think it's going to happen there, but anything can happen in this world when you've got human beings involved. I think it's important, even as we maintain the letter or the implementation of a mutual structure, to maintain the spirit of that mutual structure, too and that requires some doing.

You've got to keep your mind on the mission — that your mission is to serve day after day. It's very difficult to see anything that can get in the way of that except some massive thing like a huge stock market collapse. It would not be good for us. Every once in a while, we [00:53:46] some of these new funds. I have a little question mark about you must be betting they're better than an index fund. I wouldn't even look. I just say, "I bet they're not," because nothing can be in the long run.

I watch. I think people at Vanguard really — I don't want to overdo this — but I think they love me. I'm a normal human being — more or less normal anyway. I'm straightforward. They can identify with that. And even the people that have been there for a very short period of time seem to know who I am.


It's total authenticity which means sometimes we'll agree, sometimes we won't agree.




A member of ours named Vicki was bringing up the importance of skin in the game. You've had skin in the game with the business and have your capital with the Vanguard funds to this day. So the mix of those qualities — even though it may lead to some public disagreement — is overall a benefit to both the organization, to you and to the outcome for the customers of that.


I really don't care who benefits or who doesn't benefit. I have to tell it as I see it. I've been able to do that for a long time. I was key to Vanguard going into business. You walk a road that you think is the right road. You walk it as straight as you can. You be as honest as you can.

I've gotten so I find confessing my mistakes — of which there were a number in my career. I don't even want to get into it — hundreds, thousands. I don't know how many I've made. An infinite number, maybe, in my career. It's kind of liberating to say, "I really blew that one." I blew a lot of stuff. But the underlying thesis (if you will, the underlying concept, the underlying idea of owning a market, whatever the market may be) and getting your fair share has worked and will work. Who else can say that about what's going on in their own company?


Small failures all the way to great success. My final question. How are you spending your time now? An incredible part of your story — which we haven't talked about here but we've talked about on the radio — is your human heart. How old is your heart right now?


Well, I got my heart when it was 26 and I've had it for almost 18 years...


You're younger than I am...


Forty-two. But I'm starting to feel a little more like 84. The trail in recent years has been a little difficult — the physical trail. I've had some very profoundly serious problems and long hospitalizations, but you go into them optimistically. My wife is a powerful support and my kids are wonderful. You get over the bumps. You're always optimistic.

The idea when you go into a hospital again is they put you down on the gurney and you just go, "Hah. Here we go again." And like the whole business with the transplant, my reaction is just the same. If I thought jumping up and down on the kitchen table and screaming and yelling about the unfairness of life would help my condition, I would do it. But it occurs to me it would make it even worse.

So you kind of go along. You speak out with honesty. I'm not trying to say something to hurt somebody, but I'm not going to agree with something I don't agree with. I think Vanguard benefits from that immensely. The shareholders — I'm still close to a lot of them. I still get a lot of close correspondence.

I'm still writing a lot. I have an article about to come out in The Journal of Portfolio Management. Another article about to come out in the Financial Analysts Journal. A foreword to a book about Paul Cabot, one of the founders of the industry. And a book about John Maynard Keynes published by, I think, Oxford University Press in which I write the final chapter called, "Adam Smith and Capitalism." And I did a foreword for John Wasik's book on John Maynard Keynes as an investor.

So, I've got Keynes. I've got Adam Smith. I've got one of the industry's founders and I've got two academic articles and I'm starting to worry that I'm going to run out of things to do.


I don't think that's possible, Jack, and any time you need any extra work that you'd want to do, just come hang out with Fools.


Okay. Well, you've been a good Fool, Tom.


Well, it all started with "Bogle's Folly..."


We're associated...


We're bound by name. Jack Bogle, thank you so much for taking time. I could continue this conversation for another hour, but let's let you get on with your day...


And retire...


Thanks, Jack.


Thanks, Tom, very much. 

Read/Post Comments (23) | Recommend This Article (96)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 15, 2013, at 9:56 AM, prginww wrote:

    A wonderful interview with Mr. Bogle. I was inspired. Thank You Tom.

  • Report this Comment On November 15, 2013, at 3:17 PM, prginww wrote:

    Insightful, well worth the read.

  • Report this Comment On November 15, 2013, at 5:35 PM, prginww wrote:

    It is insightful, but seems to directly and expressly contradict the MF way. Frankly I am not sure what the take away should be?

  • Report this Comment On November 15, 2013, at 5:45 PM, prginww wrote:

    Great interview! Thanks for making this happen.

  • Report this Comment On November 15, 2013, at 9:36 PM, prginww wrote:

    A great interview. Just riveting to watch and listen to. This is the great strength of MF. MF is a business picking culture, but more than that iit is a culture strong enough to incorporate all views and wisdom and without being threatened. Most if not all of my holdings come from the pages of Value and Income (I am a One member), but that doesn't mean that reading Breakers and the other services fails to serve me in some way. Indeed, because I want small cap exposure and I believe picking those businesses to be more difficult, I index through Vanguard.

    Thanks again!

  • Report this Comment On November 16, 2013, at 5:48 AM, prginww wrote:

    Bogle is one of the very few in the financial industry that I listen to...he is a difference maker.

  • Report this Comment On November 16, 2013, at 8:09 AM, prginww wrote:

    What a fantastic interview. An hour with Jack Bogle and Tom Gardner is an hour well-invested.

  • Report this Comment On November 16, 2013, at 9:05 AM, prginww wrote:

    Great interview. It's always good to learn from the masters.

  • Report this Comment On November 16, 2013, at 11:07 AM, prginww wrote:

    Jack Bogle is Princeton classmate of my uncle, and I have had the pleasure of meeting Jack at Princeton class reunions. I also have the predominant part of our family money at Vanguard, but virtually none in capitalization weighted index funds.

    Basically I disagree with Jack Bogle on his type of index approach; I regularly beat the S&P index managing my own financial affairs. Also I am reluctant conceptually to capitalize future Social Security payments, except at a very high discount rate; it is not a contractual obligation, actuarially unsound., and a promise made by a financially strapped obligor. Our 36 year old son is unlikely to get back what he put in, if he get's anything 30 years from now.

  • Report this Comment On November 16, 2013, at 12:54 PM, prginww wrote:

    Thank you, Tom and Mr. Bogle.

    What an extraordinary conversation. Mr. Bogle's views on fiduciary obligations are certainly spot-on. I've sent this interview on to many friends and family; how I hope they will gain the critical insights and frank commentary on the financial marketing 'industry'.

    Best of good health, Mr. Bogle.

  • Report this Comment On November 16, 2013, at 3:18 PM, prginww wrote:

    About to listen to it. Read the intro & was pleased to see that "The entire conversation... is here in its entirety." Fascinating.

    Byron (nit picker)

  • Report this Comment On November 16, 2013, at 9:51 PM, prginww wrote:

    Great interview, well worth the wait! Thanks again for all the good work, Tom.

  • Report this Comment On November 17, 2013, at 9:20 AM, prginww wrote:

    That was awesome! Fool of insight!

  • Report this Comment On November 17, 2013, at 12:09 PM, prginww wrote:

    Loved the interview--many thanks. And to MelissainVA, here is one takeaway for me that blends indexing and the MF approach.

    I enjoy learning about and investing in US-based companies (about 30 at the moment). I want global exposure, but have less experience with international companies. A fraction of my portfolio is in a global index fund and an indexed emerging markets ETF. It is not either/or.

  • Report this Comment On November 17, 2013, at 12:37 PM, prginww wrote:

    Really good article that makes one think about the big picture. On one level, fool and bogle have diametrically opposed viewpoints, bogle saying you can't beat the market and fool believing you can.

    My takeaways as follows :

    - you can beat the market by investing in great businesses in a long term low cost way with a discount broker. Stay diversified and the key is holding winners which is so hard to do when a tsla or lnkd gets ahead of itself

    - indexing serves a role and a portion of everyone's portfolio should be indexed. That portion should vary on risk , age and frankly ability of picking stocks and not letting emotion crush your returns.

    - actively managed funds serve no role and should be eliminated. Most are expensive and don't match the index. Even worse is in my view they are full of fraud. Trowe price, for example, their Latin America fund top 10 positions is almost identical to the index. Most funds are index hugging with this being one of the most egregious examples I have seen. You end up paying 3-10 times the expenses but you still get mostly an index fund tied to some category. Most people don't even realize they are getting fleeced in this way. Basically you are paying for actively managed and you get an index. Even bogle mentioned typically you end up a % or two above or below the index, this is why....

    Clear takeaway for me- 50% index, 50 % individual stocks using great advice from fool stock advisor, rule breaker, and Morningstar tortoise and hare. ( I am up to 60 individual stocks between these 4 portfolios. All active mutual funds have been sold.

  • Report this Comment On November 17, 2013, at 1:00 PM, prginww wrote:

    I'm also a Bogle fan and a Fool fan. And so my portfolio is a funny blend of both. Starting out and building my foundation was almost completely index funds (after a few years of bumbling about). And then followed up with small amounts of play money investing in Fool recommendations.

    Where I am now is that the indexes provide a solid base, but the Fool recommendations seeded by play money have completely eclipsed the index funds.

    The good news is that in good years, like the past four, I am thrashing all the indexes. But during the downturn, I led the way into the pits of despair.

    But the good news only happens when you stay invested through the tough times and continue to invest every week, which is like feeding the turbobooster with rocket fuel.

    Great advise from both Bogle and the Gardners. The core of both is constant long term buy-and-hold investing leaving everything in place through good and bad times.

    Despite the disparities in the details of both, the common core principles lead to outstanding results.



  • Report this Comment On November 18, 2013, at 1:14 PM, prginww wrote:

    Cool. Not difficult to see why so many love him. It's so funny in his straightforward directness, on the subject of his loveableness. He probably reminds those around him as a beloved grandfather figure.

    The acceptance of suffering is a great life lesson too.

  • Report this Comment On November 19, 2013, at 5:01 PM, prginww wrote:

    I do think they have too many funds. They could probably reduce expenses even more if they limited their offerings

  • Report this Comment On November 20, 2013, at 10:35 PM, prginww wrote:

    Thanks, for including the transcript.

    Great interview.

  • Report this Comment On November 22, 2013, at 10:37 PM, prginww wrote:

    As I was reading the statistics on the amount of turnover in people's holdings, it occurred to me that fear and greed are not the only culprits. Sheer entertainment value seems to drive investors to watch their investments too closely, turning them into a daily soap opera.

    The daily gyrations of the stock market don't fascinate me. I often go for weeks without checking in on my portfolio, so I don't get caught up in short-term booms and busts. I've made good money following Foolish advice and not obsessing over little movements.

  • Report this Comment On November 24, 2013, at 12:29 PM, prginww wrote:

    Great interview but I would have liked to have read much more about the fundamental disagreement. TMF thinks it will beat the market handsomely over - oh, what shall we say, 25 years? - while Bogle thinks there is no chance and TMF subscribers should be indexing (apart from perhaps 5% play-money). This one should have been fought over; a bit too gentlemanly a conversation on this point!

    I think Mr. Bogle is wrong about the wonderful array of ETFs. There is a wonderful case to be made for asset allocation in this way.

  • Report this Comment On December 14, 2013, at 1:09 AM, prginww wrote:

    If fledgling investors would read Mr. Bogle's unsurpassed primer on mutual find investing, BOGLE ON MUTUAL FUNDS: NEW PERSPECTIVES FOR THE INTELLIGENT INVESTOR, they would gain unparalleled knowledge and insight into a field which is not that difficult to perform at market-matching levels. The KEY is Indexing. You have to believe it.

  • Report this Comment On December 29, 2013, at 2:06 PM, prginww wrote:

    When "JACK" BOGLE said:

    Well, name two. (Referring to anyone other than Warren Buffet that has consistently beat the market).

    Your answer should have been David and Tom Gardner. I think your record is long enough and good enough that it will never regress to average.

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