Vanguard Founder on Behavior and Investing

Jack Bogle discusses the gambling instinct and other behavioral influences on our investing habits.

Mar 12, 2014 at 12:16PM

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.

Most of us have a gambling instinct, Bogle says. In this video segment, he recommends establishing a baseline for your investing style by starting with an index fund and holding it for five years to see how you feel about the ups and downs.

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Jack Bogle: 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.

Then look around. See what's happened in the five years. See how you felt when the market dropped 50%. See how you felt when it came back. And those five-year periods are going to be very different for one investor and another, because they're all over time.

Then, when you get there, 5% in the funny-money account.

Tom Gardner: 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.

Bogle: Well, name two.

Gardner: Well, Longleaf. You mentioned Longleaf. Dodge & Cox.

Bogle: 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.

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, called 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 the 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 to the mean is a constant pattern.

Gardner: 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. So 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...

Bogle: 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!"

Gardner: "Now I'm really going to go all in."

Bogle:  "And now I'm going to go all out." 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 behavior 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.

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

Bogle: Well, when I came into the business, I had friends in the brokerage business. I bought this and that and the other thing. 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 that I just 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 -- Bogle Small Cap Growth -- and it's done rather nicely, of course. He's very smart! That's about it.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors. Tom Gardner owns shares of Chipotle Mexican Grill and Whole Foods Market. The Motley Fool recommends Chipotle Mexican Grill, Costco Wholesale, and Whole Foods Market. The Motley Fool owns shares of Chipotle Mexican Grill, Costco Wholesale, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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