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John Bogle Speaks Out

At age 78, Vanguard founder John Bogle has spent decades advocating for individual investors. As head of the mutual fund giant that pioneered the index fund, Bogle has shown how most active money managers fail to outperform the stock market index. His recent book, The Little Book of Common Sense Investing, offers compelling reasons why index funds offer most investors the biggest bang for their buck.

In short, it pays to listen when Bogle speaks. Here's a selection of enlightening comments from his recent interview with Fortune magazine.

On a possible recession
It's obvious that when your bank account runs dry, you'll likely decrease your spending. For years, America's home values and bank accounts ballooned. But this year, the clock struck midnight on that particular ball. Housing values declined and home equity vanished. As Bogle said:

I would put the odds of a recession at 75%. The economy is very much consumer-based, and I believe that 70% of the GDP is consumer spending.

The general investing climate hates to hear the word "recession." But while recessions tend to dampen market performance, true investors remain focused on buying good businesses on the cheap, regardless of recessions, depressions, or any media topic du jour. Consumers may cut back on the four-dollar lattes at Starbucks (Nasdaq: SBUX  ) or multiple colors of Crocs (Nasdaq: CROX  ) shoes, but business does go on.

In recessions, Fools might consider investing in popular firms like Wal-Mart (NYSE: WMT  ) or McDonald's (NYSE: MCD  ) , as cash-strapped consumers look for bargains. Like both of these companies' products, bargains exist in all types of markets.

Housing and subprime
No surprises here. The housing and credit markets are a mess. Problems always occur when lots of people get greedy and stray outside their circles of competence. Unfortunately, we are just now beginning to see how far outside that circle they strayed. Quoting Bogle:

I really don't see it [real estate market] improving soon. It's complicated by the fact that many people have gotten into ARMs who didn't know what they were doing. When banks were community banks, they were more careful.

And what happens when sloppy due diligence took over the lending environment?

... when banks sell loans in a bundle, they are clearly not going to be concerned about mortgage quality.

Best investment advice
According to Bogle, the best investment advice he ever got was that "'Nobody knows nuthin.'" Nobody, at least in the short-run, has any idea what the market will do.

The Dow Jones in 10 Years
Said Bogle:

... the Dow is a peculiar piece of work. Since I'm expecting 6% to 7% return on stocks, the Dow ought to grow at 4% to 5% a year ... and so it would be slightly over 20,000. But anybody who's expecting that ought to be prepared for a lot of bumps along the way.

So there you have it, directly from Bogle himself. Stocks will be fine, but expect some hiccups along the way. This should come as no surprise, and it should reconfirm the notion that market-timing is a sucker bet. Load up on good businesses when they are selling at cheap prices, and forget everything else.

On the most admirable CEOs
According to Bogle, great leaders are the exception, not the rule:

I don't have a big list of them. You've got to admire Warren Buffett [Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) ]. I like what Immelt is doing at GE [General Electric (NYSE: GE  ) ]. It must be obvious, for whatever it's worth, that names aren't tripping off my tongue.

There are plenty of good CEOs out there, but relative to the total number, they probably represent a minority. Buffett, after more than 40 years of unwavering discipline and integrity, deserves to be on the top of everyone's list.

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