2 Managers Who Get a Thumbs-Up From Jack Bogle

John C. Bogle is the founder and retired CEO of The Vanguard Group, the largest mutual-fund organization in the world, with more than 160 mutual funds and current assets totaling more than $1.4 trillion. Since his retirement from Vanguard in 1996, Bogle has spent his time studying, writing, and speaking on the financial markets and mutual funds. He is president of the Bogle Financial Markets Research Center, created in 2000 to support his ongoing work on behalf of investors.

Too many fund managers focus on serving the marketplace rather than focusing on being professional investors, Bogle says. In this video segment, he mentions two that haven't fallen into that trap but warns that a successful investor can eventually become "too big to succeed."

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Tom Gardner: Now, there have to be some that you believe are doing the right thing on the active management side. There have to be some investors that you've encountered over time that you think it's admirable what they're doing, and actually 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.

Jack Bogle: Well, I'm not sure "above average" is quite the standard, and 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 investment management, and not in the business of marketing. This has become a great, big marketing business, and 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 draw an awful amount of money, and then you can't be good anymore.

Gardner: Too big to succeed.

Bogle: 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 it all; there's an infinite number of choices. I think Longleaf probably runs four or five funds. Dodge & Cox runs five, I think. The rest of us: Fidelity runs 260 funds; Vanguard runs, I think, around 170. I'm not sure anybody really knows, and that's tough on a whole lot of levels.

Gardner: 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?

Bogle: 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 the same thing is true of every other fund -- not very complicated.

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 half of 1% in another year. 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 walls.


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